Alberta Star Development – Short Leash?

by JDH on January 6, 2007

As the chart of Alberta Star Development indicates, there was a double top around the $2.20 level, which is never good.  Obviously the stock sold off after that (as did most other stocks, of course).

However, the long term uptrend line remains intact, Alberta Star is trading over the 50 day moving average, and the MACD is moving into a better range, so for now, I’m holding.


{ 2 comments… read them below or add one }

Fabe W January 7, 2007 at 2:49 am

Sorry to contradict you here JDH, but as far as I’m aware something resisting at a previous high in no way constitutes a double top, or even the intimation of a top. It’s normal to see resistance at that level, and to require a bit of prior consolidation before the test turns into a successful break.

I think investors are sometimes too ready to see “double top” or “head and shoulder top” patterns before those patterns have even been formed.

As I understand it, to start thinking in terms of potential double top the price has to approach the neckline of the “top”, e.g. for Bitterroot that would be around 62. Even then, at least half the time (in my experience) the pattern doesn’t complete.

It’s only when it breaks the neckline that the pattern has any predictive power at all (in my experience) – even then it sometimes turns into a fakeout. Of course any support level breaking is bearish, but the additional predictive power in this case comes from the fact that you have had significant action above the neckline, making the break when it happens all the more meaningful.

When I studied chartism (admittedly some time ago, and perhaps things have changed), a pattern didn’t constitute a “double top” until the neckline had been broken.

JDH January 7, 2007 at 7:07 am

I don’t entirely disagree with you. In my analysis, I take a very simple approach: the stock is either going up, or going down. In Alberta Star’s case, it went up to around $2.20, didn’t go through it, went down, tried again, and failed. I interpret that as bearish. Whether this should be called a double top or not may be a matter of semantics. I don’t believe there is a neckline in a double top formation.

There is however a neckline in a head and shoulders formation, and you are correct, in that formation breaking the neckline is important.

As for your comments on Bitterroot, you may be correct. Or, perhaps it’s a cup and handle formation, and we are now in the handle, which may be very bullish. A good description of these patterns can be found here:

Here’s what I know for sure: Many different people can interpret the same chart in different ways, and the only way to know who is right is to wait a few months and use the best tool of all: hindsight.

I appreciate your comments; I will play closer attention to some of these other formations when I look at charts in the future.