Monday, December 19, 2016

CSAL Approaching Apex of Ascending Triangle

When a stock touches a horizontal resistance line at least three times, while retreating to at least two consecutive higher lows, the resulting pattern forms an ascending triangle.  Conventional wisdom states that this is a very reliable pattern that breaks to the upside.  Chart pattern guru Tom Bulkowski takes a different view, however, after having studied thousands of patterns.  His brief ascending triangle treatise on The Pattern Site informs us that the pattern does tend to break to the upside 70% of the time, however it ranks 17 out of 23 for profitable upside breakout trades.  He goes into much greater detail, including trading tactics, in his highly acclaimed Encyclopedia of Chart Patterns.

My experience with the ascending triangle is that, for much of 2015 and 2016, the more profitable trades were on downside breakouts.  The pattern has become extremely well known, which means it's now a prime target for stop-hunting market specialists.  The pull-back rate cited by Tom Bulkowski was 57% on an upside break.  I believe it's even higher, now, reflecting the popularity of the pattern.  Of course, to a swing trader, that means there are potentially two or three trades coming out of a single breakout. 

Communications Sales and Leasing, Inc. (NASDAQ: CSAL) is in the final throws of an ascending triangle following a 5-wave bearish impulse and at least a three-wave corrective pattern.  (I label that with traditional A-B-C labeling, however in reality it is likely an A-B-C-D-E triangle.)  Given that we're only 8 trading days away from the apex, it's fair to say that a breakout is imminent.  We're about 75% into the triangle, and that's getting a bit long.  The average breakout is around 62% of the length of the pattern, and the signal will be broken if this continues for a few more days.

CSAL Daily Chart
While we don't try to anticipate the direction of the breakout - we can play it either way - there are some aspects of the chart that suggest it will break to the upside.
  • The bottom of Wave 5 retraced 61.8% of the prior bullish impulse wave, which coincides with the 52-week high-low pattern.  That 61.8% level is a strong support level in and of itself.
  • Wave 5 ended on what appears to be climactic selling.  This was a strong candle with a shadow almost three times the length of the body.  The only negative point on that long candle is that the close was below the open.  It would be a stronger signal were it a white candle, not a red candle.
  • The pattern has broken out of the bearish channel that marked all of the impulse wave and much of the corrective wave.
  • The SMA(10), EMA(20), and EMA(30) lines are converging and appear poised to form a bow-tie pattern in which the three lines reverse.
  • The mid-point of the Bollinger Band channel is acting as support.
  • The RSI(9) pattern is decidedly bullish.
CSAL reported earnings on 14 November 2016 which, not surprisingly, coincides with the long range candle.  Earnings themselves were positive, beating by $0.03 EPS and also beating revenue by $1.62 million.  What appears to have spooked investors was an announcement as part of their earnings release that they acquired Network Management Holdings for $65 million.  NMS has 313 wireless communications towers in Mexico, 55 in Nicaragua, and 105 in Columbia.  Additionally, they hold another 114 build-to-suit tower sites that are currently under development.  The suite is expected to produce $7.9 million in additional annual revenue and $4.4 million in annual tower cash flow.  Overall, it appears to be a positive addition to their portfolio.

Given that we do not yet know when CSAL will break out of the ascending triangle pattern, we must be aware that the stock will trade ex-dividend on 28 December.  The dividend is $0.60 per share, with a pay date of 13 January 2017. 

We need to keep a close eye on the development of this pattern.  When it breaks, it's likely to move quickly.  Be aware that an upward breakout may hit resistance at the 200-day moving average.  That may be the prime location for a pull-back, in fact, sitting about 10% above the top of the triangle.  To the downside, there may be support at either the 23.6% retracement line or the lower Bollinger Band.  Either of those could be a logical point for a pull-back.  Knowing the potential for a pullback in either direction, of course, gives us probably entry points for a second play should that opportunity arise.  Be alert for the initial break as well as any subsequent entries on a pullback.

Happy Trading.

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