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A Double Top For Dollarama

10/25/12 01:17:52 PM
by Koos van der Merwe

The share price of a double top is characterized by two peaks.

Security:   DOL-T
Position:   Sell

During the formation of a double top, we might feel that the formation could be the start of a head & shoulder formation. But when the price falls below the previous trough -- a pattern that does not happen with a head & shoulder formation -- a sell signal is triggered.

Graphic provided by: AdvancedGET.
The chart of Dollarama (DOL) in Figure 1 shows how the share price of DOL has risen extremely well from a low of $29.09 in August 2011 to a high of $64.88 by July 24, 2012. The share price then dropped to $57.62 by September 19 before rising to retest the high of $64.88 and forming what looks like the double top.

However, a double top will be confirmed only when the price falls below the previous trough. In other words, the double top is only confirmed should the price fall below the $57.62 level: the trough. Until then, the formation could be that of a developing head & shoulder pattern even though the head may not be higher than the left shoulder. Drawing a support line from the low of March 6, 2012, we see that the price found support on that trendline. A move below it could be a significant sell signal.

The relative strength index (RSI) did give a buy signal on September 4 and although it corrected, it did not give a definite sell signal.

Graphic provided by: AdvancedGET.
The weekly chart in Figure 2 shows how the price has risen from a low of $17.84 in October 2009 in an Elliott wave count that is suggesting the price has completed a wave 3 and is now in the process of forming a wave 4 with a possible target of $54.26 or $47.57. With a probability index (PTI) of 82, the likelihood of this happening is very likely. The moving average convergence/divergence (MACD) did give a sell in August 2012 and is still showing weakness.

I would not be a buyer of DOL at present levels. I would prefer waiting until wave 4 has been completed, or when the MACD gives a buy signal. I shall reexamine the Elliott wave count in a weekly chart to determine whether a wave 5 up has started or there has been a break above $64.88 on the daily chart.

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.

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