Triangles are a common chart pattern. Often viewed as a continuation pattern, the breakout direction ultimately determines if the prior trend is continuing or reversing. These four stocks have all experienced strong trends recently, so the breakout direction will help determine if that trend continues or reverses.
After a nice run higher through the last half of 2013, Apple (Nasdaq:AAPL) has been consolidating in 2014 below the $575.14 high. A downside breakout occurred on March 14 when the price broke triangle support near $528. Further selling during the week of March 17 will confirm the signal. Place a stop loss above $535 (triangle) or $540 (recent swing high) with a target at $458. The target is attained by taking the height of the pattern and subtracting it from the breakout price. If price reverses course and breaks above $540, it's an upside breakout and the height of the pattern is added to the breakout price for a target of $605.
Boston Scientific (NYSE:BSX) doesn't have the prettiest triangle, but the consolidation still likely provides a trading opportunity. When the price broke below $13 on March 12 it broke the original triangle support. This trade calls for a target of $11.50 and a stop above $13.80. A bounce on March 14 has created another way to draw the triangle. For the new pattern to break, the price needs to drop below $12.60, with a target at $11.10 and a stop above $13.80. Shorting near the original breakout point of $13 provides a better risk to reward ratio, but goes against the dominant uptrend with little downside confirmation. If the price continues a rally, the upside break occurs at $13.80, providing a target of $15.30 and a stop near $12.60 or $13.
Visa (NYSE:V) is consolidating below a high of $235.50. A downside break occurred on March 13 when the price moved below $223.Target is $201 with a stop above $227.50. The price has also been moving in a small horizontal channel though; waiting for continued selling pressure below the March 14 low at $218.56 will help confirm the downside break. If the price rallies, a break above the recent swing high at $228.39 breaks both patterns, putting the target at $250 with a stop near $220.
Whole Foods (Nasdaq:WFM) has been in a downtrend since putting in a October high at $65.59. The actual triangle (black lines) has very similar highs and lows, making it more of a range than a triangle. A break below $50.40 indicates the downtrend is continuing. The target is $45.40 with a stop above $55.75. The downside break is a ways away, so if the price breaks above $55.75 first, it signals a further rally. Target is $60.75 with a stop near $50.40. This pattern is not narrowing very much (more range like), so the reward to risk ratio is not ideal. Placing a stop behind behind a recent swing high or low (yet to be determined) following breakout can improve the reward relative to risk.
The Bottom Line
Triangles are a useful chart pattern because they provide an entry, stop loss and target. The main draw back to any chart pattern is false breakouts. A false breakout occurs when a trade occurs in one direction, then proceeds to reverse and break in the other direction, or just fails to trend at all (moves sideways). Keep position size in line with account size and risk tolerance, so if a trade doesn't work out, very little damage is done to the overall trading account.