Breakouts: New Oriental Education & Tech

When you pick stocks it's a multi layered process. First we identify a bull market. Second we find the best companies in that bull market. Thirdly we research the fundamentals of those companies and pick the one with soundest balance sheet and fastest growth. Finally, we must pick the right time to buy the stock. After all, even great stocks ebb and flow, and you want to buy the flow and sell the ebb. So, how do we do pick the right time to buy and sell? With charts. The idea is to identify when the company you want to invest has a "Breakout". So in my new segment "Breakouts", I'll be showing you how to identify the same patterns chartists use to buy and sell securities. The first stock I'll be showcasing is New Oriental Education and Tech (EDU). Let's take a look:

New Oriental Education & Technology Group (EDU) is a stock that was brought to my attention a few days ago by the boys over at Investors Business Daily. They are a Chinese education services provider that has weathered the recent Chinese slowdown while almost all others faulted. "The education market is very resilient and defensive in China" said Ella Ji, analyst at Oppenheimer. "New Oriental is a very low risk company, no matter how the economy behaves." That's partly because, as any kid who went to public school and had a bunch of Chinese friends knows, education is a prized resource in China. There is insane competition to get into the best schools and universities because good educational resources are very limited. A rare, sought after commodity in the fastest growing economy on the planet? I'm in. Analysts expect the company to make $.89 next year, but I think it's more like $1.10. That means the stock is selling at  30X next years EPS when it's growing at more than 50%. Any stock selling at less than 1X it's growth rate should be considered cheap. When you mix that kind of growth with recession protection you have a winner. I was watching the stock for a few days and yesterday it cleared an unconventional "cup with handle" base. When you see a stock forming a "cup with handle" base, you want to pull the trigger when the stock has broken above the previous high before the base was formed. As you can see on the chart above, the first arrow shows the previous high was $33.20, so after the stock broke above $33.20 (I like to add 10 cents to the previous high just to be sure), I bought it. You want to see breakouts on surging volume of at least 40% above normal, and volume was only slightly above average making this breakout suspect, but it's RS line hit a new high before the stock broke out, and accumulation had been steady all along, both bullish signs. I have a two year price target of $75.

This is not a recommendation to by or sell any securities. DAK was long EDU at time of publication but positions can change at anytime.