These four stocks have ascending triangle chart patterns currently in play. One stock is pushing to break higher and two of them are right at support and looking like they could break to the downside. Another is in the middle of the pattern but when it breaks 25% or higher, a move could occur. Triangles are formed by the price of the stock converging, similar to a spring compressing. A breakout of the triangle pattern signals a release of the pent up energy, and profit potential. A horizontal upper trendline coupled with a rising lower trendline gives the triangle its ascending name. While no pattern is perfect, and sometimes the price action remains listless even after a breakout, triangles are easy to spot and provide great risk-to-reward trades for both bulls and bears. When trading a triangle breakout, a stop loss order is typically placed just outside the pattern, on the opposite side from the breakout.
SEE: Triangles: A Short Study In Continuation Patterns
H&R Block (NYSE:HRB) has been pushing higher since the middle of May. Since the stock pays a dividend, whether the closing prices are adjusted plays a role in whether the triangle has already broken out or not. The official 52-week high - and triangle resistance - is $17.46; a level which hasn't yet been breached on an unadjusted basis. The breakout has already occurred based on adjusted prices (chart). Whether using adjusted or unadjusted charts, the possibility of further upside potential remains. If the price continues to follow-through, the target is $19.50 to $20.25. On the other hand, if the stock fails to continue moving higher support is at $16 to $15.50 with a drop below the latter actually signaling a downside breakout of the triangle.
SEE: Technical Analysis: Support And Resistance
American International Group (NYSE:AIG) hit a ceiling just below $35.50 in May, and again in August and September. The 52-week high of $35.42 is therefore the resistance line of the triangle; if penetrated it signals a move higher and a target of $43.50. Currently though, it is the lower trendline of the pattern being tested. A drop below $32.50 will break the trendline and the pattern, indicating a decline to $24.50.
GNC Holdings (NYSE:GNC) made a high in July of $42.70, but prior to that and since then stock has struggled at $42, making it a crucial resistance area. The overall rise of the stock in 2012 creates a rising support line which is currently being tested. If the price drops below $36.50, selling could pick up steam. The target is $28.50. While less likely, if the price moves above resistance between $42 and $42.70 the target is $50.70. Also of note is that since May, the price action has been ranging - another chart pattern that can be monitored. The range provides support at $34 to $33.70, and if broken expect the price to head toward the target mentioned, and potentially $26.
SEE: Interpreting Support And Resistance Zones
Lions Gate Entertainment (NYSE:LGF) surged early in the year on anticipation of "The Hunger Games" movie, ultimately peaking at $16.19 in March. After bottoming out at $11.26 in May, the trend has been higher once again with the ascending trendline currently intersecting at $13.60. A rise above $16.19 creates a new high and breaks the triangle, signaling a further advance. The target is $20.50. On the other hand, if selling pushes the stock below $13.60 more sellers are likely to join the fray. In this case, the downside target is $9.10. In either case, when the triangle breaks it could result in a move of more than 30% from the September 25 close of $14.75.
The Bottom Line
Not all triangles work out, or produce a big move. But often they do. Triangles don't need to be perfect in appearance; what matters is that risk in controlled with a stop order, and that we trade in the direction of the breakout. False breakouts and losing trades occur, but with a triangle our risk is always smaller than our potential reward. Whether looking for shorting opportunities, or stocks to buy, waiting for a triangle breakout is one way to spot trades and potentially get in on the action.
Charts courtesy of stockcharts.com
At the time of writing, Cory Mitchell did not own shares in any of the companies mentioned in this article.