What a rally -- Indigo's stock has never looked so attractive

The Stock Indigo Books & Music Inc.

Yesterday's closing price $17.48

Trend Investors are always nervously trying to gauge consumer confidence as the economy comes out of a recession. Right now, they must be seeing some fairly positive signs that bode well for the return of Canadian discretionary spending.

The retailers that rely on such spending suffer when times are tough - consumers simply forgo their goods while investors tend to shun their stocks. Now, however, these stocks are handily outperforming the broader Toronto stock market. Included in this group are many of the important retail names selling consumer electronics, furniture, sporting goods, leatherwear and books - and from the looks of their share price trends, they are all prospering or at least set to prosper.

The S&P/TSX consumer discretionary index has been Stock Trends Bullish since last summer and has maintained an upward trend through the market challenges of early 2010. Although not nearly matching the performance of the information technology and real estate sectors in recent months, consumer discretionary stocks are up a respectable 9 per cent in the past three months. Retail investors should have a stake in this positive bellwether of Canadian economic growth.

The Trade Whether inspired by or despite the potential of a blossoming digital book revolution, Indigo Books & Music Inc.'s stock has never looked so good. Its shares blasted to a new 52-week high last week of $17.49 on high volume. Sometimes the character of trading volume also says something vital about a move in a stock's value. Last week's relative trading volume, although only 3 per cent of total outstanding shares, was well above its average and stands at the stock's highest level on an advancing week since the company's 2001 acquisition of Chapters Inc.

The rally off the 13-week moving average trend line in the past two weeks is especially notable for the stock's unusually high average traded value, a measure that tells us that Indigo's share price advance to its current high is supported by big players - often institutional buyers - or corporate share buybacks. Indigo authorized such a share buyback plan - up to 5 per cent of outstanding shares - back in October. In any case, big stakeholders appear to have confidence in the stock.

Technical analysis always tries to turn trading statistics - share price and volume changes - into a tradable framework. Sometimes that framework is for short periods of time (day trading); sometimes, like the analysis here, it is for longer periods that may stretch to weeks and months. Investors can look to the supporting trend and price momentum of the consumer discretionary sector and the technical quality of Indigo's recent rally as support for buying this bullish stock.

The Upside The stock is now 30 per cent above its share price prior to last year's Christmas retail period. However, the trading volume swelled after the holiday season, with unusually high trading volume in five of the last eight weeks. This building price momentum should help extend the bullish trend and deliver new highs above the stock's 2007 peak of $17.88.

The Downside The positive spin on last week's rally presented above overlooks the technical setup for a potential double top chart formation. Should the share price retreat from the current high over the next period, the stock's chart would reveal an ominous technical formation that often warns of a reversal of trend. A drop below $15 would trigger technical selling.