Posted on August 12, 2008 - by andrew

Monolithic Power Systems (MPWR) scores powerful breakout

The market’s rally has been going strong for the past few weeks now. Since the follow through day on July 21, 2008, the markets have had several big days on higher volume. During this time, you would expect leading stocks to start breaking out.  Remember, most leaders break out during the first 13 weeks of a rally. One of these leaders has been Monolithic Power Systems (MPWR).

Monolithic Power was ranked #19 in this week’s IBD 100. The IBD 100 is a list of the top 100 performing stocks based on earnings, price performance and leadership. Monolithic Power also belongs to the #36 Electric-Semiconductor Manufacturer group in IBD’s Industry Group Rankings. As the rally establishes itself, I expect to start seeing more tech stocks rise with the NASDAQ as it has clearly emerged as the leader amongst the major indexes.

Last week, IBD’s Daily Stock Analysis featured Monolithic Power. Daily Stock Analysis (DSA) is a feature on IBD’s site that analyzes a different stock every day. DSA was bullish on Monolithic Power and suggested waiting for it to cross its proper buy point. I like to read DSA everyday for ideas on stocks that I may not have found while doing my own research. Another reason why I like Daily Stock Analysis is that it helps improve my chart reading skills as it does a detailed analysis of a stock’s chart. Reading DSA everyday for the last two years has helped me tremendously in being able to spot patterns and buy points. I strongly recommend you check it out when you get a chance.

Yesterday, Monolithic Power broke out of a cup base pattern that it has been forming since June. Look at the weekly chart below (courtesy of StockCharts.com):

Monolithic Power MPWR - Chart Analysis

Monolithic Power started forming the left side of its base as the markets were in a correction. There was not much down volume in the base which is a good sign. The buy point is $27.60 or 10 cents above the highest point on the left side of the base (Point 1). When a stock breaks out of a cup base, you want the volume on the day of the break out to be at least +50% higher than normal. Yesterday, Monolithic Power took out the $27.60 buy point during the day and even rose as high as 5% above it before coming back to within +1% of it (Point 2). Volume yesterday was about +270% above average. This is an extremely bullish sign. In addition, MPWR has had strong volume while building the right side of its base (Point 3).

I think yesterday’s pullback to within +1% of the $27.60 buy point is a great opportunity to buy Monolithic Power. The strong volume leading into yesterday’s powerful breakout makes Monolithic Power very attractive. CAN SLIM states that a stock is still within buying range so long as it has not risen more than +5% past the buy point. MPWR is still within buying range until it hits $28.98.

**UPDATE**: Here’s a follow-up on Monolithic Power’s chart