Chart patterns come in many shapes and sizes, but one of my favorites is the triangle chart pattern. Triangles are formed when the price action of a stock consolidates into a narrower and narrower range. As the price action becomes confined to a smaller area - becoming more tightly wound - a breakout is soon to follow. Triangles come in three forms: ascending, descending and symmetric. No matter which form occurs, how the pattern is traded remains constant. The following triangle patterns may present breakout opportunities in these stocks relatively soon. (For more, see Triangles: A Short Study In Continuation Patterns.)
Intuit Inc (Nasdaq:INTU) stock has been consolidating since November in a symmetric triangle pattern. A rise above $54.25 will break the pattern to the upside, providing a target of $60 to $60.50. On the other hand, a drop below $51.90 will break the pattern to the downside and could trigger selling into $46. Therefore, both sides of the pattern should be watched. Stops are placed just outside the pattern, on the opposite side of the breakout. If the stock moves above $54.25, a long entry can be taken and a stop placed below $51.90. $56 to 56.50 has been a strong resistance area throughout 2011; in the event of an upside breakout watch this area closely as the stock will need to get through this level to reach the profit target.
Chipotle Mexican Grill (NYSE:CMG) has struggled to get to, and hold above, $350. This has created an ascending triangle formation as the stock continues to make higher lows since August. Ideally an ascending triangle should reach similar highs, whereas CMG has been making slightly higher highs on each price swing, forming a pattern called a rising wedge. Despite this slight deviation from the classic pattern, the stock still sets up well. If the stock can break above $353, it indicates a breakout to the upside. Keep in the mind the stock has been making slightly higher highs so a buffer can be added to avoid false breakouts. The target for an upside breakout is $425. Stops can be placed below the lower trendline below at $310. On-balance volume is diverging a bit with price, indicating potential underlying weakness. A breakout higher should be confirmed by a rising OBV reading.
Jabil Circuit Inc (NYSE:JBL) has had a strong start to the year and is very close to breaking out of an ascending triangle. If the stock breaks above $21.50, the pattern will be broken, providing a target of $24.50. Stops can be placed below $19 - the lower trendline. Therefore the reward to risk ratio is not that great currently. The $22 and $23 levels have proven to be strong resistance in the past though, so these levels should be watched as well. On-balance volume is rising though, confirming the strength seen so far this year and a potential upside breakout.
TransCanada Corp (NYSE:TRP) has been consolidating in a large ascending triangle formation since June. The stock will need to push convincingly above $45 to signal a breakout to the upside. The profit target is the psychologically significant $50, followed by $52 if it can hold above $50. The stock action has been choppy, and the corrections deep, which unfortunately means the reward to risk is not great currently. The pattern indicates stop level between $39 and $38. Near $40 is an alternative stop area. On-balance volume is in a significant downtrend, indicating breakouts to the upside should be traded cautiously and exited at the first sign of trouble. (For more, see On-Balance Volume: The Way To Smart Money.)
The Bottom Line
Triangles can be traded for both downside and upside breakouts. Stops are placed just outside the pattern, on the opposite side of the breakout. These formations can provide a good reward for the risk, especially as the stock becomes more and more tightly wound. Other indicators, such as on-balance volume can be used to aid in determining strength and the likelihood of a breakout succeeding or failing. (For more, see Continuation Patterns: An Introduction.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
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.