=DPZ — is it a buy?

(source) IBD Stock Of The Day: Stock With 1,000% Gain Nears New Buy Point

MICHAEL LARKIN  22 Aug 2018   4:41 PM ET

Domino's Pizza (DPZ) is the IBD Stock of the Day as it gets set to top its all-time high after forming a bullish base.

The stock is closing in on a buy point from a cup-with-handle base, one of the most successful of all chart patterns. It has formed a second-stage base with a correct entry of 295.34. The fact that trading has been light during the handle stage is another bullish sign.

Domino's shares closed up 1.45% at 291.54 on the stock market today. It has been a good year so far for the stock, as it is currently up around 54%. In addition, it has jumped by about 1,000% since breaking out from a similar cup base in 2011.

The stock's relative strength line is trending up, while it is well clear of its 50-day line, a key level of technical support.

The firm has impressive fundamentals, which is represented by its excellent, but not quite ideal, IBD Composite Rating of 94. In addition, the stock has an eye-catching EPS Rating of 97, which puts it in the top 3% of stocks in this important metric, which tracks earnings-per-share growth.

Domino's share price is recovering after sliding on a revenue and same-store-sales miss. It fell despite earnings topping estimates last month.

Restaurant analyst Mark Kalinowski, of Kalinowski Equity Research, previously attributed Domino's revenue gains to several factors.

These include technological advantages over other pizza companies, as more customers order online and via their smartphones. He also cited a value deal the chain has had in place for nearly 10 years: two medium pizzas with two toppings for $5.99 apiece.

Lesson : Finding Flaws In The Familiar Cup-With-Handle Base

Cup-with-handle bases are often the chart reader's equivalent to a horn of plenty. They are the most common among the successful types of bases that leading stocks form before breaking out.

But the cup is not a guarantee.

There are two basic ways for investors to defend themselves against the risk of a failed breakout, even in these most welcoming of bases. First, know as many common flaws as possible regarding cup-with-handle bases.

Second, remember to mind fundamental weaknesses often shown by stocks forming otherwise healthy chart patterns.

These cues were vital when Netflix (NFLX) broke out from a poor cup with handle in April 2006. The second-stage base began forming in November 2005, atop a big seven-month run.

In late January, a big-volume spike in the middle of the cup (1) shook up the desired formula of an orderly shakeout of weaker shareholders. The 19% gain in big weekly trade was a sign of strong institutional buying. That's bullish. Yet it also disrupted the symmetry of the base. Wild, swinging action is a red flag.

It was also possible to see the base as a cup that started with the late-January spike as its left side. But in this case, the base didn't have the required 30% prior uptrend before dipping into its cup. Another flaw.

A handle began forming in late March. It drifted lower, according to plan, but was punctuated by a shakeout in heavy trade on April 5. This was not a flaw, however; without the decline that week, the handle might have lacked the downward drift seen in good handles.

At that point, Netflix was just moving into high-definition (HD) disc rentals. It was committed to being a player in the streaming video-on-demand game, but the company still saw that market as "several years away."

A cup base has less luster when a stock's fundamentals are just mediocre. In Netflix's case, the company was recovering from a 44% drop in EPS in 2005. The SMR Rating was a healthy B, but its Composite Rating was a just-passing 80. The Industry Group RS was a B-.

A weak EPS Rating of 60 was not leadership grade. While the stock's Relative Price Strength Rating was a solid 91, the Relative Strength line was nowhere near a new high as the stock broke out in strong trade on April 18-19, 2006. The result: Shares climbed 12% in three days, then reversed (2). It dropped 45% in four months.

Lesson : Cup With Handle Base: Common, But Understand Key Nuances (REGN 9/13)

Cup-with-handle bases are common. They launch many of the most successful stock runs. But practiced investors know not to confuse "familiar" with "simple."

The cup-with-handle pattern can be cagey, challenging investors with difficult choices. This is why it's worth studying and understanding the nuances found in recent examples to see what is working and what is not.
Regeneron Pharmaceuticals (REGN) launched out of a cup in December 2009. The base was V-shaped, a flaw (please see a historical chart on MarketSmith.com). In addition, IBD-style investors would have likely sat out the breakout because the drugmaker wasn't set to become profitable until the first quarter of 2012.

It wasn't until after the company's second profitable quarter, reported in July last year, that the stock staged its real breakout — also from a cup with handle.

The key prerequisite was in place: a steep climb of more than 30% before the pattern started to form in April. Some investors may have been reading the pattern as a double-bottom base with a 137.92 buy point. But the first pullback appears too shallow, and the stock didn't rebound quickly after hitting a low of 107.31 in late June. (1)

The stock shot up near 137 in heavy trade on July 25, the day the company reported earnings. It gained 5% in strong trade the following day, but still hung below the pivot.
When shares finally did clear the mark, it was in very weak trade — clearly not a breakout. The stock traded sideways and closed tight for four weeks. In the process, it formed a handle with a 142.06 buy point.

Rumors of a takeover by French drugmaker Sanofi (SNY) sent shares up 3% on Aug. 23. The strong volume move broke shares above the buy point, christening an advance that has tallied a 119% gain through last week.

When Actavis (ACT) finished a cup-with-handle base in September 2011, investors may have been leery. The stock had just cleared a second-stage cup with handle, but only briefly, before diving into the much deeper base. The correction undercut the prior base and reset the stock's base count. That was a positive. But the cup's right side was not picture perfect.

First, it erupted practically straight up from the bottom in an 11% gain, to retake both 10- and 40-week-lines support in the week ended March 23, 2012. Then it began to form a handle with an upward drift, a negative. This weighed two flaws against the pattern.

But by early April, it had a mild shakeout, setting up a 67.71 buy point. On April 20, it cleared that buy point on a barely sufficient 38% increase in volume, then wavered for a few sessions.

On April 26, a 7% stab higher in huge volume sealed the breakout. It also set in motion a run-up that had doubled the stock's price through Friday's close.