Lithium Americas Stock Breaks Out, Implying Higher Stock Prices

Credit:iStock.com/Evgeny Gromov

LACDF Stock: Inverse Head and Shoulders

The lithium sector is catching a bid, and with all due respect, the reasoning is quite sound. Centralized governments are starting to move away from combustion engines by banning the sale and production of these vehicles by a set mandate. It started in Europe, and now China is following suit. This dynamic is causing money to flow into lithium plays like LITHIUM AMERICAS C COM NPV (OTCMKTS:LACDF) stock because it is a direct beneficiary of this shift towards clean electric power.

Electric cars run on batteries, and these batteries contain lithium, which is the exact product that LACDF stock mines and extracts from the ground. The fundamentals support Lithium Americas stock, and so do the technicals, which is my preferred method of choice when analyzing a stock.

I use technical analysis to generate views on an investment because the indications that it produces are timely. Applying timely data points to an investment strategy is extremely effective. I have been studying and applying this method of analysis for nearly two decades. I have spent so much time using this method for one simple reason: when it is applied correctly, the results are outstanding.

Lithium Americas stock is a direct beneficiary of the new mandates set out by a few select centralized governments. The LACDF stock chart was already suggesting that a move towards higher prices was in the making, so when the stock price appreciated by 69.32%, it was not the least bit surprising.

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The following stock chart illustrates the technical price pattern that was suggesting that a move towards higher stock prices was in the making.

LACDF Stock Chart

Chart courtesy of StockCharts.com

This LACDF stock has been annotated in order to highlight the inverse head and shoulders price pattern that was painted on the stock chart.

An inverse head and shoulders price pattern is identified by its shape. It consists of three troughs and a neckline. The middle trough, which is labeled the head, is the largest. The first and third troughs, which are labeled the right and left shoulders, respectively, are usually of equal size. The neckline is formed by connecting the reaction highs.

The neckline represents a significant level of price resistance that was responsible for creating this pattern. Each and every time this level was tested, a sell-off ensued, which created the troughs. Breaking above the neckline would compete the price pattern, and more importantly, suggests that higher stock prices are on the horizon.

On August 30, LACDF stock was finally able to do what it was unable to on many previous attempts. The stock closed above $0.90, completing the inverse head and shoulders price pattern.

The great thing about this technical price pattern is that it not only suggests that higher prices are likely, but it is also nice enough to provide a potential price objective. This price objective is obtained by taking the depth of the head and extrapolating that value above the neckline. Applying this method to the price chart produces a price objective of $1.58, which is just a bit higher than the $1.49 high that Lithium Americas stock attained on September 12.

The timing of this move towards higher stock prices was implied by a very influential momentum indicator, which is illustrated on the following Lithium Americas stock chart.

lithium americas stocks chart

Chart courtesy of StockCharts.com

This Lithium Americas stock chart illustrates that in July, a very influential indicator known as the moving average convergence/divergence (MACD) indicator generated a bullish cross.

To bring everyone up to speed, MACD is a momentum indicator that is used to distinguish between bullish and bearish momentum using the crossing of a signal line.

The bullish MACD cross that was generated in July indicates that bullish momentum was influencing the trading action in LACDF stock, which in turn created a path of least resistance geared towards higher stock prices. The bullish momentum suggested by this indicator was instrumental in creating the necessary tailwinds to complete the inverse head and shoulders price pattern.

Analyst Take: 

In August, Lithium Americas stock completed a technical price pattern that suggested that higher stock prices were on the horizon. This pattern was being reinforced by a key momentum indicator that was suggesting that the path of least resistance was geared towards higher LACDF stock prices.

A significant rally has since ensued, and the indicators that were influential in suggesting that higher prices were on the horizon are still in bullish alignment, supporting the notion of a continued run towards higher prices.