The vertically integrated filtration company engaged in the production and marketing of air filters used in a variety of industry sectors, including commercial/industrial, aerospace, chemical, alternative energy and pharmaceuticals, Donaldson Company, Inc. (NYSE: DCI) seems to be gearing up for a surge as per its latest charts.
#1 Symmetrical Triangle Pattern Breakout: The daily chart shows that the stock had recently broken out of a Symmetrical Triangle pattern. This is a continuation pattern and is characterized by two converging trend lines connecting a series of sequential peaks and troughs. This pattern is marked on the daily chart as purple color lines. The breakout from a symmetrical triangle pattern usually signifies the start of a bullish move.
#2 Price above MAs: The price is currently above both the short-term moving average of 50-day SMA and the longer-term moving average of 200-day SMA. This usually implies a possible bullish bias for the stock.
#4 MACD above Signal Line: As you can see from the daily chart, the MACD line (blue color) is currently above the signal line (orange color), indicating a possible bullish bias.
#5 IH&S Pattern: As you can see from the weekly chart, the stock is currently forming an Inverted Head and Shoulders (IH&S) pattern.
This IH&S pattern is marked in the chart in orange color. An IH&S pattern is a strong bullish pattern and a breakout from this pattern indicates that the stock may move higher in the short term.
#6 Fibonacci Level Support: Usually, after an up-move, stocks retraces to any of the key Fibonacci levels before surging back again. DCI had taken support at the 50% Fibonacci support level of the upmove before moving higher, as seen from the weekly chart. This looks like a good area for bounce-back.
#7 Bullish RSI: The RSI is above 50 and moving up, indicating possible bullishness.
#8 %K above %D: The %K line of the stochastic is currently above the %D line in the weekly chart, indicating possible bullishness.
Recommended Trade (based on the charts)
Buy Levels: If you want to get in on this trade, you can purchase the shares of DCI if it closes above the resistance level of $52.20.
TP: Our target prices are $60 and $70 in the next 3-6 months.
SL: To limit risk, place a stop loss at $47.70. Note that this stop loss is on a closing basis.
Our target potential upside is nearly 15% to 34% in the next 3-6 months.
For a risk of $4.50, the target rewards are $7.80 and $17.80. This is a nearly 1:2 and 1:4 risk-reward trade.
In other words, this trade offers nearly 2x to 4x more potential upside than downside.
Risks to Consider
The stock may reverse its overall trend if it breaks down with high volume from the symmetrical triangle pattern. The sell-off of the stock could also be triggered in case of any negative news, overall weakness in the market, or any regulatory changes in its sector.
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