Markets

Reliable Chart Pattern Targets Double-Digit Run in Sleeper Stock

In the post-financial crisis world, many cherished technical indicators and techniques stopped working as expected. The poster child is trading volume, which has been nearly useless on a market-wide basis. And for individual stocks, many basic chart setups led to false starts and quick stop outs.

It is therefore refreshing to see a chart pattern working as it is supposed to work, even with the little glitches that seem to linger. That does not guarantee success, but for a stock such as semiconductor maker Altera (NASDAQ: ALTR ) , the technicals are lining up nicely.

Before getting into the chart, Altera benefits by being a member of the technology sector, which is a leader in the market today. It further benefits by being in the semiconductor group, which itself is breaking out to fresh multi-year highs.

Studies have shown that group action is a very big portion of an individual stock's move. Theoretically, if there is enough business for the sector then there is enough for the company, assuming of course that the company is healthy.

And if prices are rising and hurdles, i.e. resistance, are being overcome, then there is a good chance the stock is ready for even more gains.

ALTR had been in a funk for many months. Even now, after a nice short-term gain, it is trading where it was more than three years ago. So how do we know it is ready to make a substantial move higher?

Well, it just broke out to the upside from a nicely defined chart pattern with money finally flowing back into the stock at a nice clip. Using the September 2013 high and the December 2013 low as starting points, we can see a clear triangle or coiling pattern.

A triangle pattern tells us that volatility is contracting and the battle between bulls and bears is coming to a crossroads. When prices move above or below the borders of the triangle, then the market is telling us which side won. As of this month, Altera bulls have taken control.

As a nod to the current environment, the breakout had a false start. Earlier this month, the stock poked its head above the upper border of the pattern and fell back within it. However, the pullback was modest, and on Sept. 16, the stock rocketed higher to get back into gear. It followed through with more gains in the days that followed. It wasn't perfect, but it embodied the spirit of a technical breakout.

Even though prices are still well below 52-week highs, on-balance volume is already at a new high. That suggests money has been flowing into the stock over the past few months as demand swelled. Students of economics know that rising demand without rising supply pushes prices higher.

If we measure the height of the triangle and project that up from the breakout we get a target of about $43.50. That would be a hefty gain for a stock that is just now waking up from a long slumber.

Recommended Trade Setup:

-- Buy ALTR at the market price

-- Set stop-loss at $35

-- Set initial price target at $43.60 for a potential 18% gain in eight weeks

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.