When searching for trades, I typically focus on fundamentals first and use the chart as a tool to time the trade and estimate the anticipated move. But from time to time, a technical breakout is so powerful it cannot be ignored, and the fundamentals play a supporting role.

#-ad_banner-#Today’s pick is breaking out from a highly reliable chart pattern. This same pattern delivered gains of 27% in just two weeks in Darden Restaurants (NYSE: DRI) and 70% in less than two months in Mattel (NASDAQ: MAT).

A breakout from a wedge formation is one of the most compelling, explosive and successful technical signals I use. 

The wedge patterns that led to winning trades in MAT and DRI were of the bearish variety. Now we have an opportunity to jump on a breakout from a bullish wedge in DSW Inc. (NYSE: DSW).

The pattern emerged on DSW’s chart after the shoe retailer announced better-than-expected Q3 earnings and raised its full-year guidance. Shares gapped up on the opening on Nov. 25, breaking out of a channel and hitting an eight-month high. The stock then made a series of lower highs.

A wedge is formed as these lower highs are met by higher lows. Essentially, investors let shares back down from the high while growing more bullish as the days wear on, keeping shares from falling further. This phenomenon builds for a period of time, eventually forming a point from which shares break out.

The strongest bullish wedge formations are those where a stock with good fundamentals comes to a point at or just above a previous resistance level, which is exactly what we have with DSW. 

Add to that the two golden crosses on its chart — either one of which on its own would be enough of an impetus to go long — and the bullish case is solidified.

The 20-day moving average (green line) crossed above the 200-day average (red line) on Nov. 26, signaling a fresh short-term bullish trend. And with this week’s breakout, the 50-day eclipsed the 200-day, triggering a long-term buy signal.

This long-term golden cross has been a long time coming. The 50-day hasn’t been above the 200-day moving average since mid-February. Longer trend durations typically lead to bigger reversals when the trend does change.

As one more feather in our cap, recent options activity showed 2,400 December $35 calls being purchased for around $0.80. That’s close to a $200,000 bet that DSW will be above $35.80 by Dec. 19. Analyzing out-of-the-money options volume can help us see where the smart money is placing their bets. 

Since this is a technically focused trade, we will use key support and resistance levels to determine our stop and price target.

For our stop-loss, we will use the $32.50 area, which is the pre-gap down close/low from May 27, as well as the opening print/high of the gap up on Aug. 26. 

As for the upside target, the $37.85 level has been a “sticky” area since the beginning of the year. It’s also the next highest peak above the current breakout level.

I expect this target to be hit within two months, and using a call option strategy, we can leverage this 9% move into 31% profits.

DSW Call Option Trade
Today, I am interested in buying DSW April 30 Calls for a limit price of $6

Risk graph courtesy of tradeMONSTER.

This call option has a delta of 81, which means it will move roughly $0.81 for every dollar that DSW moves, but it costs a fraction of the price of the stock.

The trade breaks even at $36 ($30 strike price plus $6 options premium), which is 3.2% above current prices.

If shares hit my $37.85 upside target, our call options will be worth at least $7.85. Once you enter the trade, place a good ’til cancelled (GTC) order to sell your calls at that price. 

While I think this target will be hit within two months, the April options offer the closest expiration available to capture that time frame and give us a little extra time for the trade to work out. 

Recommended Trade Setup:

— Buy DSW April 30 Calls at $6 or less 
— Set stop-loss at $2.50
— Set price target at $7.85 for a potential 31% gain in 2-4 months 

Note: There’s another call option strategy that lets you earn $1,200 or more each month from the stocks you already own — by “renting” them out to other investors. To learn about this easy process, click here.

This article originally appeared on ProfitableTrading.com: Powerful Breakout Signals This Retailer is an Immediate ‘Buy’​