These four stocks have all broken to the downside out of chart patterns recently, indicating continued moves lower. Since the breakouts have already occurred pullbacks toward the former pattern, or levels within the pattern, present the best opportunity to get in.
Celgene (Nasdaq:CELG) put in a double-top during December and January, and then proceeded to decline below the low ($157.18) between the two the highs. The break lower signals the price could continue to fall once this pullback to the upside ends. The price is likely to meet resistance at or before $163, which presents an area to get short or exit longs. One possibility for a stop is to place it above the recent high of $170.88; this can moved down to a newer recent high after the order is filled and the price has fallen away from the entry point. If the price holds below $163, and then moves back to the downside, the target is $140 based on a Fibonacci extension level.
Freeport-McMoRan (NYSE:FCX) has also recently completed a double-top. The price made two similar highs near $38 in October and January, then saw a strong decline below the low ($33.81) between the two high points. $34 to $35.50 is a likely resistance area on the move higher. A move into that region which slows down and then begins to drop again signals the entry. Initially a stop can be placed above $37, or above a new swing high as it forms in the resistance area. The second stop loss option keeps risk very small, but has a greater chance of being pre-maturely stopped out. The downside target is between $29 and $27.50; the deeper the pullback into the resistance zone, the more conservative the target.
Chesapeake Energy (NYSE:CHK) made a high of $29.06 in November and has been making lower lows since. It recently broke below triangle support at $25 signaling a likely further decline. Near $25 is the entry area for shorts. The target for a triangle breakout is $21; stops can be placed above recent highs near $27. A rise back above $27 indicates the breakout lower was false, and the uptrend resuming becomes a possibility.
Ingersoll-Rand (NYSE:IR) has been moving in a trend channel since May, but broke below that channel in February. The price penetrating the lower trendline isn't the real issue-trendlines often need to be redrawn. The drop from the top of the channel was aggressive, the bounce off the channel lows was muted, and then selling began again. If the price breaks back below the recent low at $56.12 it is likely the price will continue lower, as a lower high and lower low will be in place. The downside target is $53.40.
The Bottom Line
Chart patterns offers a way to visually spot trade set-ups based on reversals or continuation of trends. The risk and reward of these patterns can vary greatly based on how they traded and where stops and targets are placed. Stops are typically placed above a recent swing high (for downside breakouts), but can be moved down as new swing highs form, reducing risk. Always trade within your personal risk tolerance.
Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.