I mentioned on my previous post that AK Steel (AKS) had formed a consolidation triangle. The break out from that consolidation occurred in early December. This type of consolidation pattern is a very strong buy or sell signal that I look for when a stock has declined or advanced significantly. Since I was long AKS I will focus on the long perspective.  I try to accumulate shares when these consolidations have started to form. During these types of consolidations I want to see a series of higher lows develop. I buy when stock moves up off the low if it was higher than the previous low. These are low risk trades because I am buying close to my stop. I would stop out if this price fell below the previous low before my entry point thus eliminating the upward buying pressure. AKS provided buying opportunities in the consolidation triangle that I drew on the chart to the right. AKS is now sitting on its 200 MA where the 50 MA is about to cross upward over the 200 MA. As a result AKS is presenting another entry opportunity. This is a low risk trade since a break below this level would be bearish and if such a break down were to occur I would place my stop just below the 200 MA.

Fundamentally AKS has higher fixed costs than other steel companies and may not be able to pass higher costs on to its customers. The stock even at this level is overpriced with a P/E of 180 times earnings. The market however is pricing a greater demand for steel going forward as the economic recovery progresses. The market may have also been pricing an acquisition of the company since many observers feel that more consolidation is inevitable in the steel industry. Regardless, AKS has moved up with the sector as a whole.

After my last post where I indicated that AKS had broken out of the consolidation, I mentioned that Encana (ECA) was forming a similar consolidation. You can see that it too has broken out of the consolidation triangle on strong volume - a very bullish signal. It would be ideal now if it pulled back and found support on the 200 day moving average before moving higher. ECA has suffered greatly since it spun off its oil division as Cenovus. Natural Gas prices have continued to fall and ECA has not moved higher with other energy producers. Last week they announced that they have signed agreements with several smaller oil exploration companies who are looking to drill for oil on land to which ECA has royalty rights. The market  is clearly happy with this development and ECA stock  cleared some very significant resistance levels last week as a result.

Studying charts for technical indicators such as this will often allow us to position ourselves in a stock before a fundamental development drives the price higher.

In my next blog I will discuss another of of my favourite buy signals - the " pennant".


The preceding is the opinion of the author and is in no way intended to be regarded as investment or trading advice.