In technical analysis, many consolidation patterns have names associated with them due to the shape that forms on the chart. While many traders get caught up with the names and whether the patterns develop perfectly, it is much more important to think about the psychology behind the pattern and why market participants are acting in a certain manner. The ascending triangle is usually a continuation pattern, and the key point traders need to understand is that this pattern often serves as a rest stop for a stock in an uptrend.
When a stock is in an uptrend, it will eventually start to lose momentum as traders who were long begin to take profits. Once buyers and sellers reach a stalemate, the stock will enter a period of consolidation where shares will be exchanged among traders betting on a continuation and other traders betting on a reversal. In an ascending triangle, the stock will typically stall at a fixed price level as it tests the top of the pattern. However, buyers will begin to buy at higher prices on dips, forming higher lows as the pattern progresses. Eventually, the stock will break out of one side of the triangle, confirming the pattern as either a continuation or reversal. (For more, check out Analyzing Chart Patterns: Triangles.)
Recently, many oil pipeline stocks cleared an ascending triangle. This could mean a trend move higher for the sector is in the works. For instance, Boardwalk Pipeline Partners LP (NYSE:BWP) settled into an ascending triangle from July through September. It cleared the triangle later in September and after a run to $34 it has settled into a pullback toward the breakout area. The $32 level should be monitored for support; if BWP holds up in this area it could lead to a move to new highs.
El Paso Pipeline Partners LP (NYSE:EPB) just finished breaking out of an ascending triangle a few days ago. One important aspect to look for in a triangle is whether the consolidation becomes more volatile and the stock's trading range narrows over time as traders reach an equilibrium. Notice how the trading range in EPB began in August at almost 4 points and eventually narrowed to under 1 point. This is typically a clue that consolidation is nearing an end.
Atlas Pipeline Partners, L.P. (NYSE:APL) is another pipeline stock that recently cleared a triangle as well. APL formed an ascending triangle from August through October after a sharp gap higher in late July. APL never traded back into the gap, providing a clue that it would eventually resume its uptrend. APL eventually cleared the triangle in October, but has continued trading in a tight range. Traders should monitor the $20 level as the new breakout area. (For more, see The Anatomy Of Trading Breakouts.)
Buckeye Partners L.P. (NYSE:BPL) is an example of a pipeline that has not cleared its ascending triangle yet. BPL has been consolidating since August, and is currently testing the top of the triangle. Traders should monitor the $65 area as the breakout level, and $62.50 as a mark of a breakdown from the pattern.
It's interesting that so many stocks in the same sector are following a similar pattern. Institutions will often accumulate a basket of stocks in a sector and it's possible that this is occurring in this group. While there could be a variety of catalysts for accumulation in this sector, the bottom line is that the charts are showing indications of a possible trend move higher. Traders should monitor the key levels identified by the triangle pattern and act accordingly. (For more, see Triangles: A Short Study In Continuation Patterns.)
At the time of writing, Joey Fundora did not own shares in any of the companies mentioned in this article.