AGL Energy Limited: a breakout analysed

The recent breakout of AGL Energy Limited (AGK) provides a textbook example of a stock breaking from a symmetrical consolidation triangle. It’s worth an in-depth examination for stock traders interested in learning how breakouts function.

On 26 February, AGL Energy posted underlying profit for the second half of 2009 that surged by 22%. The company maintained its guidance for the fiscal year of 2010 on anticipation of steady revenue, raised the interim dividend from 26¢ fully franked to 29¢ fully franked, and reiterated its interest in NSW electricity assets as the privatisation process unfolds.

Such a strong earnings announcement was bound to have a positive effect on the stock’s price action. Therefore it was no surprise when AGK surged above the upper resistance line of its symmetrical consolidation triangle on the news, leaving a gap between 14.02 and 14.20 and racing higher to set a new reaction high currently at 15.20, as shown on the chart, below:

Symmetrical triangles such as this one break to the upside roughly 43% of the time, and 57% to the downside. Upside breaks are vastly preferable, as they tend to last longer (an average of 163 days versus an average of 74 days) and move further (an average 41% climb versus an average 19% drop), providing greater opportunities for stock traders to profit from the move.

The previous analysis of AGK expected to see a retraction back toward the lower trendline as the price action tightened toward the symmetrical triangle’s apex, which indeed happened in the days following that analysis. Volume throughout this time period remained fairly muted, and the slow stochastic gyrated on both sides of the 50 level through mid-February. This was a clear illustration of traders awaiting a change in market sentiment, necessary to propel the stock either higher or lower from the triangle’s confinement.

The day of the breakout, 26 February, saw trading volumes more than double from the previous day. On the stochastic graph, the %K crossed above the %D with deep separation between the lines. The stock’s price gapped up on open to 14.28, well above the resistance of the upper trendline, and closed at 14.37. This signalled an immediate buy and traders did not hesitate, with buying pressure on the second day of the breakout, 27 February, pushing the price higher again.

Trading volumes have remained elevated since the breakout. However, stochastic analysis indicates a period of consolidation may occur. Traders should watch for the price to retract back toward 14.70 before the next move higher.

technical analysis by Craig Liles