Daqo New Energy: On The Cusp Of A Bullish Third Wave (Technical Analysis)


This is exclusive new coverage where using Seeking Alpha’s top rated stocks from the website, we will be looking to identify stocks that have a top rating but also that are primed for a third wave breakout. Combining top rated stocks with the three wave theory, we will be actively covering potential third wave breakouts along with how the third wave is fairing once broken out above waves one and two towards target.

Daqo New Energy (NYSE:DQ) is a polysilicon manufacturer based in China. Raw polycrystalline silicon, commonly referred to as polysilicon, is silicon which serves as an essential material component in the solar manufacturing industry. As the world looks to move to green energy, demand vs supply of this material has been unbalanced. Last quarter’s earnings saw a revenue beat just shy of $100 million, and we will cover some rating figures from the Seeking Alpha website before moving to the wave analysis.

Below we can see the recent macro high and low in this monthly chart.

Daqo Monthly (Ovalx)

Daqo’s most recent high was in Feburary 2021 where the share price topped out circa $130. Four bearish three wave patterns have technically completed since then but a surprise in recent revenue reports combined with demand for this product has seen Daqo’s share price form a wave one and two structure on the monthly chart with resistance at $77, now the target for the third wave breakout.

Below we can see the monthly chart with the wave one and two along with the potential path for the third wave.

Daqo Monthly (Ovalx)

If we look at the monthly chart, we can see a bottoming at $32 with that bearish indecision candle reaching a high of $53. The next monthly candle finished in the same formation with a low of $38 and a high of $47. This can be interpreted as a complex three wave pattern because there is a low and high with rejection and we can see the following month’s bullish candle staying within the low $32 but choosing to go higher above $53. Technically, this pattern we are now examining is a second third wave with the first technically completing at the numerical replication of wave one at $74.

It is the bottom of that candle that drove price above $53 initially that will be the start of our second wave one which will be $36 – $77 with the potential wave two $77 – $57. Should the third wave break out above $77 there is now a current third wave target of $112. With the next earnings date for Daqo not due until October it could be that the third wave breaks out imminently in anticipation of a solid or better than expected earnings number coupled with high demand for polysilicon.

Below are the quant ratings and factor grades, along with a ratings summary compiled by Seeking Alpha. The company has over 90% rated as (A) coupled with (Buy) rating from Seeking Alpha, Wall street and the SA authors.

Seeking Alpha Ratings (Seeking Alpha )

Seeking Alpha Ratings (Seeking Alpha )

To finalize, I have selected hold until the third wave chooses to break out above $77. A target of $112 if the third wave does break and a stop outside the wave one of $35. When using the three wave theory, we can choose to place our stop outside the wave two which would obviously expose less risk should the third wave be rendered a fail, the issue with that strategy is that very often, the wave two hasn’t fully formed and once the third wave has broken out, it can return to pip slightly below the wave two before driving higher and going to target. Should the third wave break out, I would expect Daqo to arrive at target $113 within 90-120 days.

About the Three Wave Theory

The three wave theory was designed to be able to identify exact probable price action of a financial instrument. A financial market cannot navigate it’s way significantly higher or lower without making waves. Waves are essentially a mismatch between buyers and sellers and print a picture of a probable direction and target for a financial instrument. When waves one and two have been formed, it is the point of higher high/lower low that gives the technical indication of the future direction. A wave one will continue from a low to a high point before it finds significant enough rejection to then form the wave two. When a third wave breaks into a higher high/lower low the only probable numerical target bearing available on a financial chart is the equivalent of the wave one low to high point. It is highly probable that the wave three will look to numerically replicate wave one before it makes it’s future directional decision. It may continue past its third wave target but it is only the wave one evidence that a price was able to continue before rejection that is available to look to as a probable target for a third wave.

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