Triangle Breakouts: Two Higher, Two Lower

By Cory Mitchell | Updated September 02, 2014 AAA

Triangles show a convergence in price action, like the coiling of a spring. The price movement following a triangle breakout is generally quite strong, when the price action leading up to the triangle was also strong. The following four stocks are close to triangle breakout levels, but the moves that follow will vary in intensity and direction.

Kraft Foods (Nasdaq:KRFT) was moving in an uptrend before the triangle. Given the prior uptrend, the expectation is for a breakout higher. Based on this, long trades can be taken between $52.5 and $54, with a stop below $52. For more confirmation, traders can wait until the actual breakout occurs at $54.50, or wait for the price to exceed the recent swing high at $54.92. Upside target is $60, with significant resistance between $58 and $59. The wave down off the top was fairly strong, so while the expectation is for a break higher, the evidence isn't overwhelming. A drop below $52.50 is likely to trigger further selling; a drop below $51.75 should add to the selling pressure. In the event of a downside breakout, the target is $47.

Regions Financial (NYSE:RF) broke out last week signaling another primary advance. Movement prior to the triangle was quite strong, so the target is $11.25. Some resistance at $10.50 is possible, but isn't expected to hold off the advance. Stops on longs can be placed below $9.50. False breakouts are always a possibility; if the price falls back below $9.50 that's a signal the price is likely to continue lower. If recent lows near $9.25 are taken out, that should add to the selling. Downside target, in the unlikely event of a false upside breakout, is $8.

CMS Energy (NYSE:CMS) is flirting with a downside breakout. After rallying strongly, the stocks witnessed significant selling in May and didn't recover, but rather entered this descending triangle (lower highs). If the downside breakout develops, the target is $23. The breakout level is near $26, but the swing low at $25.74 is key level to watch. Shorting opportunities should be considered short-term plays, given that the stock pays a dividend. With a $1.02 dividend, investors may look to pick up the stock near $23 in the event of a downside breakout--at that price the dividend yield is almost 4.5%. Decent for a stock which is also in a long-term uptrend. If the stock rallies off $26, and breaks above $28, that would be an upside breakout. Target is $31, with strong resistance near $30.

Wisconsin Energy (NYSE:WEC) is moving in a very large triangle since May. The stock broke out of the triangle, to the downside, on January 6 but then quickly jumped back inside the formation on January 7. Given the very choppy trading over the last couple months, a precise breakout level is hard to pinpoint. A continued move lower indicates the breakout is legitimate; the traditional target is $35 to $34.50, although given the long-term uptrend a more likely target is $38, at which point the price is likely to hit significant support. This stock pays a dividend of $1.53, so a move to the target area provides a dividend yield of near 4%, in a stock that's been appreciating over the long-term. A rise above $42.50 breaks the triangle to upside, signaling another advance. Target is $48 with resistance possible at $45.

The Bottom Line

Triangles present of a number of ways to trade a stock. If there is an overall expectation on the breakout direction, then trades can be taken inside the triangle. This keeps risk quite small as stop losses are placed just outside the triangle, on the side opposite to the expected breakout. Traditionally a trade is taken as the price breaks out. The risk is slightly higher, since a stop is still generally placed outside the opposite side of the triangle, but there is a bit more confirmation on which way the price is going. Breakouts can also be used for analytical purposes. A downside breakout for example let's investors know that they can hold off and wait for a better price to buy at. Always manage risk with a stop; triangles aren't perfect and false breakouts can occur.

Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.

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