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CUP WITH HANDLE


August Technology Corporation

03/24/03 01:50:44 PM
by Koos van der Merwe

August Technology Corp. (AUGT) designs, manufactures, markets and services automated visual inspection equipment for the detection of micro-defects. For the fiscal year ended 12/31/02, revenues fell 16% to $25.1 million and their net loss totaled $8.9 million, up from $351 thousand. Not a company one would look at that closely, so why has a brokerage firm upgraded it to a strong buy?



Security:   AUGT
Position:   Sell

A look at August Technology's chart below tells me the following:

August Technology fell with a gap in July 2002 and then spent the next four months, till November, building up a consolidation strength and rising to fill that gap at $7.51 after reaching a low of $3.46 in August 2002. At the same time, it created a "head' in what appears to be a head and shoulders pattern, forming the right shoulder in January 2003. The calculation from the head to the neckline, 3.62 (7.51 - 3.89), gives a target of: 0.27 (3.89 - 3.62), a sign that you should stay clear of this stock.


The long-term support line, AB, drawn as a parallel to the resistance line CD, does show support which the share actually found at "B'" and on an oversold RSI indicator-- nothing that shouts out, "Hey - buy me!"

But then, when you look at the volume, a different picture forms. Every time the price falls, it falls on falling volume, a sign of strength. Secondly, after the price reaches a certain "low" level, it suddenly rises (see red arrows) and on very strong volume. Soon after volume falls once again to below average, almost as if to say, "Thanks, I have my fill, and I am prepared to wait long-term."


August Technology
Graphic provided by: AdvancedGET.
 
At the moment, the price is falling once more and on falling volume after having risen very strongly on rising volume from $2.20 on the 26th of February, 2003 to $4.43 on March 14th. This retracement could be forming the handle of a cup and handle pattern as shown. This suggests that any movement above $4.35 would be a buy.

The upper target, should this occur, would be $4.35 - $2.20 = $2.15 + $4.35 = $6.50, which is close enough to the resistance line CD to be feasible.

My risk reward profile is as follows:

Buying at $4.35 and using a 10% stop-loss signal gives me a stop-loss at $3.92, and a loss of $0.42 (4.35-3.92).

The calculated target is $6.50, with a profit of $2.15. This is greater than the 2.5:1 profit loss ratio I require (0.42 x 2.5 = 1.05).




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.

Address: 3256 West 24th Ave
Vancouver, BC
Phone # for sales: 6042634214
E-mail address: petroosp@gmail.com

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