Triangles chart patterns often indicate a continuation of the trend, hence being classified as "continuation patterns." Over the last several weeks a number of stocks have formed triangle patterns as the upside momentum in the market slows from the hurried pace seen in earlier in the year. Upside breakouts in these stocks are the most likely possibility, but the downside breakout must also be entertained. With the triangles converging, prices are nearing breakout levels, and in some cases have already broken through.
SEE: Continuation Patterns: An Introduction
General Motors (NYSE:GM) has been consolidating since the middle of February. This has created a symmetric triangle formation. The formation was broken to the upside on Monday but Tuesday witnessed a quick retreat back into the triangle. If the stock moves below $24.90 it would be a downside breakout, and a drop below the recent low at $24.38 confirms it (also confirming the upside breakout on Monday was false). When the stock broke above $26 the triangle was officially broken which means the stock is likely to target $30. A move back above Tuesday's high at $27.03 would confirm that outlook. $28 was a support level in early to mid-2011 and then became resistance in August. The stock has struggled to move above it since. If the target at $30 is reached, it is quite likely it could extend higher as old resistance is cleared.
Lufkin Industries (Nasdaq:LUFK) also very recently broke higher out of a triangle pattern. Since the start of February Lufkin Industries have been holding above $73.65 creating strong support - the base of the triangle. Over nearly the same period, the stock has been making lower highs, creating the falling upper trendline of the formation. This created a descending triangle that was broken on March 30 on increased volume (a positive confirmation signal). The target for the upside breakout is $88. While a reversal is less likely at this point, a drop below $73.65 signals further downside, potentially to $63.
SEE: The Utility Of Trendlines
The descending triangle pattern in URS Corp (NYSE:) is less defined, but still tradable. Support is present between $41.50 and $42, which provides for a horizontal triangle bottom. On February 21, the stock gapped higher, but then gapped lower again on February 28. The intra-day high after the gap lower is the price point used to create the upper band of the triangle. In this way, a move back above $44 breaks the triangle providing an initial target of $47, and a further target of $49 if the February high at $47.16 is eclipsed. A drop below $41.50 on the other hand signals a downside and a target of $38.20. Primary support is just below $38; therefore, a decline below $38 is unlikely in the near future.
overhead it is possible a downside breakout could occur as well. Triangles patterns are commonly traded by entering a trade in the breakout direction and placing a stop just outside the opposite side of the triangle. Using such a method can provide attractive risk/reward set-ups.
At the time of writing, Cory Mitchell did not own shares in any of the companies mentioned in this article.
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