With the S&P 500 having just broken to upside out of a flag-like chart pattern, many other stocks are seeing similar patterns. While not all these stocks are showing an exact flag pattern, they all have the same characteristics--a sharp move higher followed by a consolidation. The consolidation is likely to break to upside indicating another strong advance. Keep in mind, since each stock has a slightly different technical setup, the trades and expectations will vary.
Consol Energy (NYSE:CNX) moved up more than 10% off the February low and has now consolidated below $41. An upside breakout occurs when the price moves above $40.80, as that will break the small descending trendline. The recent high is $41.01 so a break above that level can also be used. The target for this pattern is $43.50, although $41.75 can be used to take some profit off the table as well since it is a Fibonacci extension target. Following the breakout, the stop can be placed below the small rising trendline at $40, or alternatively below the consolidation low at $38.66.
S&P Oil and Gas Exploration & Production SPDR (ARCA:XOP) also staged an aggressive rally off the February low, clearing several swing highs from prior months. A very aggressive interpretation of this pattern is that the price started rallying again when it broke through $70 (small descending trendline). Letting the price move above $71, or the recent high at $71.27, provides more confirmation though. Target is $75.50, although a Fibonacci target at $72.80 can be used to collect some profits as well. The 52-week high is $73.76, therefore the price will need to clear this resistance area in order to reach the higher target. Stops can go below $68.28 or just below $69.75 following the upside breakout.
Schlumberger (NYSE:SLB) fell off its October high of $94.91, but following a bottom in December, the price is has been making higher lows and higher swing highs. The February rally was the strongest of these swings, and the price is currently consolidating between $93.84 and $90.60. A break higher occurs with a move above $93.84, while a stop can be placed below $90.60. The 52-week high is at $94.41; this is a potential area to take profits as it is likely to provide some resistance. If broken the next target is $98.25.
With Analog Devices (Nasdaq:ADI) the aggressive play is to buy on a move above the March 4 high of $51.42. An alternative is to wait for a break above the consolidation high at $52.38 as this provides more confirmation the consolidation is over and the trend resuming. First target is at $53.25, and full target for the pattern is $55.15. A stop can be placed below the recent low at $50.23.
The Bottom Line
A sharp move followed by a consolidation is a highly tradable pattern, mainly because the reward is quite favorable for the risk. There are no guarantees the price will break higher though. This is why traditionally traders wait for the price to break above the highs or a trendline of the consolidation, as this indicates the trend is continuing. Earlier entries are possible which slightly decrease risk and increase potential profit, but also elevate the chance of being stopped out before the actual breakout occurs. One downside is that the consolidation may continue, creating slightly higher consolidation highs or slightly lower consolidation lows. This can result in failed trades, and will require redrawing the consolidations. Regardless of strategy, risk can be capped with a stop loss and assuring position sizes are not too large for the account or personal risk tolerance.
Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.