Two in One Technical Analysis- Dover Corporation
Nikhil is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Long Term Chart Patterns Series
Brief Fundamental Analysis: I always do a brief check of fundamental ratios prior to a technical analysis-based speculation to make sure that nothing fundamentally large is misplaced in the stock and may cause the stock to move against its prior technical signals.
Business: Dover Corporation (NYSE: DOV)
Dover operates a global portfolio of manufacturing companies, operating in 4 business segments: Industrial Products, Engineering Systems, Fluid Management, and Electronic Technologies.
Quick Ratio Valuation: From Fool.com and Finviz.com
P/B: 2.23 P/CF: 9.8 P/E: 13.7 Forward P/E: 11.99
Quick Ratio: 1.9 Current Ratio: 2.56
Short Ratio: 2.25, Short Float: 2.43%
2 analyst price targets: $72, and $73-premiums to today's prices.
Technical Basis:
Over the course of the last 3 months, the Dover Corporation chart has formed an “Ascending Triangle.” The Ascending Triangle is a common technical analysis pattern used to predict an upside breakout in a stock. The Ascending Triangle is formed by two major trend lines occurring in a stock chart: 1) an upward trending support line 2) a flat resistance line.
These lines converge to make an Ascending Triangle, and the stock price will bounce within these trend lines until it breaks out on the upside. The idea behind this chart is that the upwards trending support line is a signal that the sellers are leaving the security, while the horizontal resistance represents the buyer’s refusal to buy at a higher price. When the optimism of the sellers, who leave the stock, and the pessimism of the buyers, who wish to buy at lower prices, converges, it causes a rush to get into the stock as it is recognized that the sellers are completely out of the stock, and optimism returns to the buyer side.
Here is a list of things to remember when dealing with an Ascending Triangle:
1. The price should hit each trendline at least twice to form the triangle.
2. Usually volume is trending downwards until the breakout. Confirmation of the pattern by a sudden rise in volume is preferred but not necessary.
3. The Upwards Breakout often occurs 2/3 of the way into the triangle.
4. Sometimes there will be a return to resistance level (which converted to support upon the breakout) before the move begins in earnest.
5. To calculate a target price, add the resistance line to the vertical leg of the triangle. Remember to use a margin of safety with this target price.
*Credit to FreeStockCharts.com for the image
The chart for DOV has hit the upper resistance three times and the ascending support twice times. DOV's volume has dramatically decreased ever since the ascending triangle began, signaling the validity of the trend. As there has been no volume confirmation yet, I believe that DOV might bounce before making its major breakout. The chart indicates a price target range of $64 to $72. The chart is also made stronger by the presence of a strong reversal trend, the Reverse Head and Shoulders Chart Formation.
In this chart, the right and left shoulders should form troughs of roughly equal lows, and the reaction highs of the shoulders and head form the neckline. As with the Ascending Triangle, there must be volume confirmation to be confident of a breakout. Coincidentally, price targets for this formation are determined by the length from the bottom of the head to the neckline, which gives a price target of $72, mimicking the Ascending Triangle.
Recommendation:
I would consider buying an ITM short term call option on DOV. Specifically, Buy the March 2012 Call Options with a strike of $50 for $9.30 (Bid8.70Ask9.90Volume0OpenInt87).
EDIT:
Looking back on it, what a surprise, the double signal DOES work!
So I hope you got in on this rec. :)
Fool Blogger Nikhil Shamapant does not own shares in any of the companies mentioned above, and will not buy shares in the next two trading days.
