Classic Technical “Set Ups” – Part I

A few years ago, we were introduced to an excellent free newsletter called The Chart Report. It comes out at the end of the trading day and is a group of curated X/Twitter posts that provide insightful economic and technical analysis of the markets.

Those of you who follow us on social media know that we are not shy about reposting interesting research, and we often re-post content from The Chart Report.

The other day, we saw one particular post that interested us, and we reached out to the author – Frank Cappelleri of CappThesis – to see if he might want to join us on the HX Podcast.

He generously agreed, and we posted the episode last week, listen here or watch here.

It was one of our favorite episodes in recent history, and we were very impressed by Frank. His work is excellent, but the most impressive part of his approach is the simplicity and clarity of his communication.

There are a lot of great technical analysts out there doing fantastic work, but some of it can be quite esoteric and difficult to understand. You can follow him on X/Twitter here and sign up for his newsletter here.

We don't usually go through current ideas on the HX Podcast, but I liked Frank's approach so much that we decided to go through a recent report in which he highlighted three ideas.

All three ideas were very interesting, but what was best about the piece is that they were three different TYPES of technical setups representing three different strategies.

In HX Daily this week, we have decided to share these ideas and discuss the technical setup that Frank identified. 

We will also add our views on the ideas from our approach, which we call "Quantamental.” We didn’t make that term up, but it stands for "quantitative" plus "fundamental."

Those of you familiar with our TRADING and INVESTING strategies know that we consider both types of analysis in our ideas.

So, here is the first type of technical setup Frank identified…

1)  BULLISH PATTERN BREAKOUT – UPTREND

The stock Frank identified is Warren Buffett's company, Berkshire Hathaway Inc. (NYSE: BRK.B). Here is what he wrote…

“BRK.B has been consolidating its early 2024 spike over the last few months. It's now getting closer to completing a multi-month continuation pattern. It's not there yet, but an eventual breakout would target 454. The stock has leveraged this same kind of bullish formation three prior times since the start of 2021, which it will be trying to replicate again now."

Here is the chart…

We love this idea, and this is – perhaps – the most classic of technical patterns out there.

He is pointing out that we have seen the stock consolidate like it has recently, three other times in the last few years. Each time, it eventually broke out and moved to new highs.

We also would add that those other consolidation periods were of similar duration to the current period.

Frank's strategy would advise that you BUY this stock once it breaks out from this current level. Let’s say above the $420 level.

Again, we LOVE this idea.

We always like trading stocks like Berkshire, which are some of the all-time GREAT stocks in stock market history. That history of "winning" means there is an inherent demand for the shares and mitigates your downside.

The company is solidly profitable with an outstanding balance sheet. We like this when looking at technical patterns because, with a well-established company, we are less likely to get hit with something out of nowhere.

The stock is also in a nice, well-established uptrend. This means that the balance of buyers and sellers for the stock across the last few years has been more enthusiastic demand than supply.

Whatever combination of factors is out there to create this demand almost doesn't matter. It is clear, however, that it is there and has persisted for some time.

From our “quantamental" perspective, we also look for operational momentum.

Berkshire is a problematic stock because of its diversification. It also (surprisingly) doesn't have much analyst coverage.

We think investors with this stock focus on book value per share and earnings per share or "EPS ."Here are the charts of the estimates for those two metrics for 2024 across the last few years…

Again, Berkshire is a quirky stock from a metrics and coverage perspective – just like Buffett.

Both of these charts, though, have been stable and generally moving higher. This is a good sign. 

Berkshire is not driven as much by these metrics as a traditional operating company, but they still account for a lot.

Overall, this is a perfect example of this classic technical setup – a potential bullish breakout of a stock in a clear uptrend.

If you see this pattern – and can back it up with the fundamentals – we think you are looking at significant potential profits.

In tomorrow's HX Daily, we will share another type of BULLISH BREAKOUT but at the opposite end of the spectrum.