Triangles are a chart pattern that occur fairly frequently and often provide a great reward-to-risk ratio. The pattern is formed when the price action of a stock continually narrows; when the price breaks out of this narrowing formation expect a sharp move in the breakout direction. A stop-loss order is typically placed outside the opposite side of the pattern as the breakout, and a target is achieved by adding/subtracting the height of the entire pattern to/from the breakout price. The following four stocks have well defined triangles underway and are awaiting a breakout.
BP (NYSE:BP) has a large triangle going back to late 2011, so when the breakout occurs it'll likely result in a long-term trend developing. While the breakout prices will change over time (because the triangle trendlines are converging) the upside breakout point is currently at $44.75 and the downside breakout at $40. The height of the formation is approximately $14 ($48 minus $34); add this to the upside breakout price, or subtract it from the downside breakout price, to attain a price target. While a breakout isn't imminent, when it does occur, a rough estimate of the target is $58.75 on the upside or $26 on the downside.
Copart (Nasdaq:CPRT) has been moving within a triangle pattern since the start of the year. With the price nearing the apex of the triangle, a breakout is likely to occur within April or May. The price is currently testing the upper trendline at $34.40. If the price rallies through this point the upside target is $40.40, based on the $6 height (rounded down) of the chart pattern. While less likely, if the price drops below the lower trendline at $32, the target is $26.
MICROS Systems (Nasdaq:MCRS) has a similar sized pattern to Copart. Predominantly taking place in 2013, the price recently bounced off the lower trendline. Current breakout points are $46.50 and $42.15; as the lines converge the breakout points will change, though. The approximate height of the triangle is $8.50. If the breakout were to occur shortly, the upside target is $55, but if the breakout is to the downside, then the target is $33.65.
Since September 2012, SunTrust Banks (NYSE:STI) has been forming a triangle. The upside breakout point is currently $29.75, and the downside breakout point is $27.25. When the breakout occurs, the triangle height of approximately $5.50 is added or subtracted to provide the target. Currently trading near the middle of the triangle, the breakout may not occur for some time. This means the breakout price and target may vary slightly in the future, but are roughly $35.25 on the upside or $21.75 on the downside.
The Bottom Line
When trading triangles or any chart pattern, don't jump the gun and assume the breakout direction before it occurs. Wait for the price to move through either of the triangle trendlines before entering and then place a stop just outside the opposite side of the pattern. The more the price consolidates - moving toward the apex of the triangle - before breaking out, the better the risk/reward ratio since the stop will be smaller, but the target is based on the whole height of the formation.
Charts courtesy of stockcharts.com
At the time of writing, Cory Mitchell did not own any shares in any company mentioned in this article.