Triangles are a chart pattern that create low risk, relative to reward, trading opportunities. With the S&P 500 bouncing off support, indicating the uptrend in the stock market is continuing, the upside triangle breakout trades in these four stocks are particularly compelling. Ideally a triangle breakout should be accompanied by increasing volume.
Denbury Resources (NYSE:DNR) has been moving in a triangle pattern since May. On September 25 the price moved above $18.15, breaking the triangle and signaling a further advance. The target for the breakout is $21.15. This is attained by adding the width of the triangle at the widest point--roughly $3--to the breakout point. Having already advanced to $18.81 as of the October 1 close, waiting for a pullback toward the triangle is recommended as this will reduce the risk on the trade. Stops can be placed near $17.25 or slightly below. Unfortunately, a pullback may not occur before the stock reaches its profit target. If the pullback does occur, an entry near $18.25 provides a nearly 3:1 reward to risk ratio. The triangle breakout was associated with increasing volume, which helps confirm the trade signal.
Eastman Chemical (NYSE:EMN) has been in an uptrend for the last two years, but has been in a triangle following a significant move higher at the end of July. The October 1 closing price of $79.43 is right on the triangle resistance line. A move above $79.50 will break the pattern and signal a further advance. $80 has been a resistance area since August 15, so also waiting for a break above $80.15 will reduce the chance of a false breakout. If the upside breakout occurs, the target is $88. A stop can be placed just below $76.50.
Liberty Global (Nasdaq:LBTYA) is in a strong long-term uptrend and a triangle breakout to the upside provides evidence that the trend is continuing. The triangle is not perfect in this stock; while it can be drawn, there is also a small channel inside the triangle. With two patterns here, a move above $80.25 will break them both, and provide a target of $86.50. A stop can be placed at $77.40.
Unum Group (NYSE:UNM) has consolidated in a triangle pattern after moving higher for most of the year. The $30.83 October 1 close is near the middle of the triangle, but the price is closing in on the apex so a breakout is likely to occur shortly. The breakout occurs if the price rises beyond $31.40. The target is $34.90 and a stop can be placed just below $30.10.
The Bottom Line
Triangles are a simple consolidation pattern but can be used to gain entry into a trend. The best signals occur when the breakout direction is in alignment with the overall trend direction of the stock and the overall direction of a market index (such as the S&P 500). Increasing volume on the breakout also confirms the trade signal. Risk is controlled using a stop placed near the opposite side of the triangle from the breakout; targets are established using the width of the pattern added to the breakout price.
At the time of writing, Cory Mitchell did not own shares in any of the companies mentioned in this article.
Charts courtesy of StockCharts.com.