Breaking Diamonds

01/29/2015 7:00 am EST

Focus: STOCKS

Gregory Harmon, CMT

Founder and President, Dragonfly Capital Management

Since Valentine’s Day is rapidly approaching, Greg Harmon, of Dragonfly Capital, outlines how diamond chart patterns can be broken and he cites an example of a stock that has formed such a pattern and now has the potential to break higher for an impressive gain.

The engagement season is fast approaching with Valentine’s Day only two weeks away. Between this season and Christmas, diamond dealers do a heck of a lot of their business. All is great when you know the answer before you ask the question and put a diamond on her finger. But what happens when the answer is not what you planned? Yuck.

You can’t just crush that diamond even though that’s what you might want to do. It’s the hardest substance on earth. They make big mining drill bits out of it, for gosh sakes. If you really need to break a diamond, look to stock charts instead. They happen and break, both up and down, all the time.

chart
Click to Enlarge

The chart in Monsanto (MON) is one example. This stock shows a clear diamond has formed in the orange space. Starting in a tight consolidation that expands and then tightens again. This pattern is often talked about as a topping pattern, but it can be a continuation pattern as well. From this chart, a continuation higher is where I will place my bias.

That is because the momentum indicators are turning to the upside. The RSI is making higher lows as it rises and the MACD has crossed up and is rising. A move out of the diamond looks for a comparable move to the one that preceded entering the diamond. In this case, a break higher would target the 132.50 area.

With that kind of a gain, maybe you don’t need to crush that diamond engagement ring, but just use it as a down payment on the next bigger one for a better girl.

By Greg Harmon of Dragonfly Capital

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