The Geo Group Is Breaking Out Of Prison (Technical Analysis, Rating Upgrade) (NYSE:GEO)

Investment thesis

The Geo Group (NYSE:GEO) has retraced about 17% since my last downgrade on December 2, 2022, while the stock has successively built more positive momentum and investors are now facing the same price level but in much better overall conditions. In this article, I discuss how the actual setup could likely lead to massive gains, while I also underscore the risks and discuss two strategies investors could consider in their contingency plan. The discussed technical aspects lead me to upgrade GEO to a buy position.

A quick look at the big picture

The industrial sector in the US could not maintain its relatively strong performance observed at the end of 2022 and has lately been outperformed by other groups, such as the technology and consumer cyclical sectors, that have been leading the recent stock-market rally. While trucking and marine shipping are leading industries in the sector, the security and protection services industry continues to lag and struggles to build up positive momentum.

Considering more specific groups of the industry, the Nasdaq US Benchmark Security Services (NQUSB50205040N) peaked on December 13, 2022, after rallying 62% from its bottom on July 5, 2022. The ongoing correction was overdue as the benchmark has been quite extended when observing its moving averages, leading the index to fall under its EMA55 with increasing relative weakness when compared to the broader iShares Russell 2000 ETF (IWM), and negative momentum.

Where are we now?

In my last article “The GEO Group: After 40% Performance, It’s Time For An Update” published on December 2, 2022, I discussed my concerns about seeing GEO retracing because of the exhaustion of the buy-side after the stock formed a steep parabolic uptrend. In fact, the same day, the stock retraced and lost about 17% in the coming weeks, until bottoming on December 21. Investors who followed my idea and chose one of the discussed strategies, could avoid the pullback and had the possibility to even increase their position while the stock turned into its actual short-term uptrend.

Investors who waited on the sideline, are now facing the same price, but in a better situation, as the stock could establish its peak, confirming the support on its EMA200 on its weekly chart, and is now forming a new attempt to overcome its overhead resistance. GEO is successfully breaking out into stage two, and it’s time to consider the likely outcomes while defining a new contingency plan based on the most recent developments.

What is coming next?

On GEO’s daily chart, I outline my interpretation of the actual uptrend, which I consider to be part of wave 5 of the ongoing Elliott impulse wave sequence. My former assumption of the pullback led to form wave 4, and the stock is now facing a breakout from its overhead resistance at $12.44. While the first breakout attempt has been rejected in the last market session, a few elements are hinting at possibly more attempts to follow.

GEO’s MACD is in its early stage of signaling a positive momentum buildup, while the stock’s relative strength compared to the IWM underscores the stock’s resilience. Additionally, we can observe that GEO’s short-term EMAs are consistently trailing supports in the stock’s uptrend, while spikes in the buy-side volume are confirming this trend.

A breakout where the stock confirms its price level above $12.44 and $12.65 could project the stock to my next target, which I estimate to be at $15.40, where the stock would reach the ceiling of the uptrend channel. Each impulse wave led to testing another limit of the trend channel, and the likelihood of seeing wave 5 extending until that level, is high.

Although the recent positive development, the stock’s actual situation comes with its risks. Breaking out from its overhead resistance requires most likely much conviction and even if the stock could break out, it is likely the achieved surge would lead to a test of its support before the stock could continue in the described trajectory. The company is expected to report its Q4 2022 results before market opening, and the upcoming session could determine the success or temporary failure of the breakout attempt. This week could see increased volatility on the markets, as among other important macroeconomic data, the US CPI for January is expected to be published today, and could have a significant impact on the broader stock market.

At this point I consider two strategies:

1. Investors with higher risk tolerance could build up some exposure in GEO with the expectation of seeing the stock breaking out and participating in the earliest move of the likely upcoming rally. In this case, I would set my stop-loss tight under the EMA21 and in case of a breakout, move the stop-loss between $12 and $12.44, to give the stock space to test its support, while also running a free trade with zero risk exposure.

2. More risk-averse investors who are interested in buying GEO, could instead wait for the stock’s reaction to the quarterly results, and successively build up their position if the stock’s price action signals a convenient entry point, and the stock is at least keeping the price level if its EMA21. Here, I would consider prices around $11 as my lowest stop-loss, as the stock would otherwise risk falling back excessively under its EMA55 on its daily chart or its EMA200 in its weekly chart.

In both cases, I would size my position according to my overall intended exposure in the stock, by certainly not taking the full position at once, but scaling in if the stock confirms the discussed uptrend. With a minimum risk/reward ratio of 3.5, the actual situation led me to change my rating on GEO, upgrading the stock to a buy position.

The bottom line

Technical analysis is not an absolute instrument, but a way to increase investors’ success probabilities and a tool allowing them to be oriented in whatever security. One would not drive towards an unknown destination without consulting a map or using a GPS. I believe the same should be true when making investment decisions. I consider techniques based on the Elliott Wave Theory, as well as likely outcomes based on Fibonacci’s principles, by confirming the likelihood of an outcome contingent on time-based probabilities. The purpose of my technical analysis is to confirm or reject an entry point in the stock, by observing its sector and industry, and most of all its price action. I then analyze the situation of that stock and calculate likely outcomes based on the mentioned theories.

In this update on The Geo Group, I highlight another very interesting technical setup that is offering significant opportunities to investors, as the stock could be in front of breaking out from its most important overhead resistance. GEO is forming its fifth Elliott wave of this upward impulse sequence, which could lead the stock to significantly higher prices, with a minimum risk/reward ratio of 3.5. While higher volatility could characterize the coming market sessions, investors can prevent an unforeseen pullback by applying strict risk management in their contingency plans. The discussed elements lead me to upgrade GEO to a buy position.