Watsco Inc. (NYSE: WSO)

Today’s article focuses on a stock approaching a 52-week high. As a reminder, when it comes a stock hitting a 52-week high, I prefer to look for ones hitting a “NEW” high. To clarify, this would be a stock that hasn’t hit a new 52-week high in quite some time. In addition, and more importantly, I want the stock to have broken through a key area of resistance. This way I know that it wasn’t just any move higher, it was a key breakout.

Watsco, Inc. is the distributor of air conditioning, heating and refrigeration equipment and related parts and supplies in the HVAC/R distribution industry. As of year-end 2011, the company operated from 542 locations in 38 states, Mexico and Puerto Rico with additional market coverage on an export basis to Latin America and the Caribbean, through which it serves more than 50,000 contractors and dealers that service the replacement and new construction markets. The products Watsco distributes consist of equipment, including residential central air conditioners ranging from 1-1/2 to 5 tons, gas, electric and oil furnaces ranging from 50,000 to 150,000 British thermal units, commercial air conditioning and heating equipment and systems ranging from 1-1/2 to 25 tons, and other specialized equipment.

To review Watsco’s stock, please take a look at the 1-year chart of WSO (Watsco, Inc.) below with my added notations:

WSO has been trading mostly sideways from February until present, while running into a clear resistance at $75 (navy). After falling below the $70 support (green) level in May, the stock has worked its way back above that $70 level and looks to be heading towards $75 again. The $75 resistance meets my definition of a clear resistance level that would signify an important 52-week high breakout if WSO could manage to break above it. IF that were to happen, the stock should probably be heading higher.

The Tale of the Tape: WSO has formed a key resistance level at $75, which would be a 52-week high breakout if the stock can break above it. A long trade could be entered if WSO breaks above $75 or pulls back to $70, with a stop set below the level of entry.

Before making any trading decision, decide which side of the trade you believe gives you the highest probability of success. Do you prefer the short side of the market, long side, or do you want to be in the market at all? If you haven’t thought about it, review the overall indices themselves. For example, take a look at the S&P 500. Is it trending higher or lower? Has it recently broken through a key resistance or support level? Making these decisions ahead of time will help you decide which side of the trade you believe gives you the best opportunities.

No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.  Capital preservation is always key!

Good luck!

Christian Tharp, CMT