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Trade Setup: RMD

The price of ResMed Inc. (RMD) recently broke out of a resistance barrier on multiple timeframes.

First, the monthly chart shows a clear break of resistance near the $60 level. Historically, this behavior in RMD and other stocks is constructive for a long set up. You can see from the past 10 years of monthly price data that RMD has a tendency to trend, consolidate for a while, and then trend again. At the point of breakout, a long position was unconfirmed by MACD, a trend indicator, but with further price improvement it exhibited a bullish crossover. Additionally, comparing RMD’s lows in its most recent range bound consolidation with MACD-H confirms its advance leading up to its breakout.


Second, after zooming in one order of magnitude shorter to the weekly time frame you can see a more granular view of the breakout from the monthly chart. From a trend perspective we now see the price above its 40-week moving average (200SMA) and a fairly consistent bottom left to top right price trend over the past 5 years. Trend is also confirmed with the direction of MACD and its bullish crossover.


Third, on the daily chart RMD exhibited a textbook breakout over 60 with above average daily volume. Leading up to the breakout you can see a clearer picture of higher lows as price re-tested resistance at the $60 level. Additionally, we see steady improvement in RSI over the past year and confirmation on the breakout with its own highs. 


You can see on the longer time frames that RMD previously made a swift move from 60 to 75 and then back to 50 with 60 providing significant resistance. Based on the recent action, price has begun to advance just as quickly as before with its change in the supply and demand balance as well as improved general market conditions.

However, risk should always be managed and, depending on your time frame, when initiating a long position at the breakout a stop loss could be placed below the recent swing lows of 55 on the monthly and weekly charts or 58 on the daily chart.

Occasionally, breakouts will consolidate through price, not time, after the initial thrust out of a consolidation zone. Note how after the breakout RMD retested the $60 area before resuming its advance.

To manage the upside, you can use an Average True Range (ATR) to take profit on any swift expansions. Always have a plan for where to get back in after scaling down your size so long as the price still warrants a position.

As always, please feel free to contact me with any comments or questions. Thanks for reading.


John

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