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Baker Hughes International (NYSE:BHI) gapped higher on Thursday after releasing better than expected earnings and is poised to test 3-year highs near $77.29. The company’s results showed a strong start to the year with better than expected margins across all regions. Margin growth was primarily driven by expansion in the Gulf of Mexico as well as Canada which increased momentum generating a MACD buy signal.
Baker Hughes Earnings
Baker Hughes reported a profit of $328 million, or 74 cents a share, up from $267 million, or 60 cents a share, a year earlier. Excluding charges and other items, earnings were 84 cents a share. Revenue increased 9.6% to $5.73 billion. Analysts had expected adjusted earnings of 78 cents on revenue of $5.71 billion.
Momentum on Baker Hughes Stock
Momentum on Baker Hughes stock is strong as the MACD (moving average convergence divergence) index generated a buy signal. This occurs when the spread (the 12-day moving average minus the 26-day moving average) crosses above the 9-day moving average of the spread. The MACD index moved from negative to positive territory which confirms the MACD crossover buy signal.
The relative strength index (RSI), which is an oscillator that also measures momentum, climbed higher which reflects increasing momentum. RSI also measures overbought and oversold levels. The current reading of 69.7, is just below the overbought trigger level of 70, which can foreshadow an impending correction in the share price.
Breakaway Gap
BHI broke out, gapping above horizontal trend line resistance near $66.56, on the strongest volume seen since January. A breakaway gap occurs when the price of a stock is breaking out of their trading range or congestion area. A congestion area is just a price range in which the market has traded for some period of time.
Volume will generally pick up significantly when a breakaway gap occurs, not only because of increased enthusiasm as prices move higher, but because those who are short the stock need to purchase the shares back.
The weekly chart shows that the next level of target resistance is the high made in July of 2011 at $77.29. In February the 50-week moving average crosses above the 200-week moving average which shows that a long term up trend is now in place.
The weekly relative strength index (RSI) moved higher this past week along with the price of the stock which reflects accelerating positive momentum. One caveat is that the weekly RSI is printing a reading of 73, which is above the overbought trigger level of 70, and could foreshadow a correction.
Trading Baker Hughes Stock
Investors looking to take advantage of the upward momentum in BHI could purchase the stock near the lower end of the breakaway gap. I recommend using the upward sloping trend line that connects the highs in March to the high in early April that comes in at $67.
Investors could consider taking profits near $77.00, which is slightly below the July 2011 weekly highs. That would translate into a quick profit of 13%.
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