Thursday, September 4, 2008

The Georgia Gulf Triangle

While doing my morning stock perusal, I stumbled upon the chart of Georgia Gulf (GGC). The company is involved in making vinyl products for the building sector and aromatics such as acetone (used in nail polish remover among other things). Certainly this company doesn't fall into the "sexy" category, but many great companies don't. Not that GGC could be called a great company, especially not by long-term shareholders who have seen their stock lose 95% of its value in the last few years. I'm positive the word "great" hasn't been uttered in those camps in a while...but the tide may be turning.

What caught my eye today about GGC's chart was the absolutely perfect right-angle triangle pattern that the stock has been putting in. But before we look at that, I'd like to briefly review the weekly chart to show you how it clearly indicated that the stock was breaking down. Investors who had obeyed those tell-tale signs could have gotten out much earlier and not have had to suffer the ego-bruising nor the investment loss.
GGC breakdown indications
You can see from the weekly chart that GGC put in a double-top formation at the end of 2004 and early 2005. Major support was broken in early April affording astute investors the opportunity to take some money off the table. The symmetrical triangle formed a few months later was a continuation pattern indicating further decline on the horizon. From there, the stock oscillated in price, but always bouncing off of the $23 level--that is, until it didn't. In the middle of October, it busted through that level on heavy volume (not shown in the chart) where it fell like an angry meteor before landing at its all-time low of just under $2 on July 17th of this year. This was a major Maalox moment for GGC investors, and had they understood what the chart was telling them, they could have avoided this disaster.

This was the bad news.
Is there hope?
The good news is that the company may be shaping up because the chart is in a good shape. Yes, you read that correctly. The chart is in good shape because it's in a good shape, and that shape is a right-angle triangle. A right-angle triangle is a more powerful variation of the symmetric triangle pattern and is formed when one of the edges is parallel to the x-axis. This edge represents a support or resistance level and breaking through that level is meaningful, especially if accompanied by stronger than normal volume. This is exactly what happened to GGC today as you can from the daily chart below.
Price target
So, assuming that the price is indeed breaking out, how far can we expect it to rise? Good question. The answer, according to the tenets of chartology, is to plot a line through the first peak of the triangle that is parallel to the base line. (Line A-A' on the above chart.) This line represents the price objective which prices may be expected to meet or exceed. The caveat here is the resistance level at $5. If the stock makes it through that, then there doesn't seem to be any other major technical barriers standing in its way.

How to play it?
The stock is so cheap right now you might as well buy it, but if you want more bang for your buck I'd go with the 2010 January 5 call options. Since its call options are fairly liquid, you could write covered calls against the stock or the option to generate some income (paper trade this strategy for a few months first).

I know we haven't discussed triangle formations or their close relatives--pennants, flags, and wedges--but I was so excited about seeing such an obvious one today I just had to discuss it. Either tomorrow or in the next few days we'll take an in-depth look at these basic chart formations to see what information they hold so we can add them to our arsenal of cooking tools.

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