Chart patterns are a popular trading method because they provide entry points, stop loss levels and target prices. They also serve a useful analytical purpose. A completed head and shoulders pattern, for example, often indicates the trend has reversed. The breakout of a triangle can also let you know which direction the price is starting to move. Whether a chart pattern occurs in the middle of a trend, or ultimately marks the end of the trend, these patterns are worth noting. Here's four that are near breakout levels right now.
Qualcomm Incorporated (QCOM) has had a gap down, rally, gap down, rally price movement going back to the summer of 2014. The pattern repeated in January but since the March the price has stabilized--in a triangle pattern--between the February $62.26 low and the March $74.09 high. The trend is down, so a drop below $67.50 breaks the pattern and indicates the downtrend is continuing. The price target, based on the six week triangle, is $62.75, just above the February low. An upside breakout at $69.60 indicates a short-term rally may commence with a price target of $74.25 If that target is reached, and there's a lot of resistance to overcome (including an earlier false breakout high at $71.90 from April 13), it indicates the long-term trend is shifting up.
After surging higher in January, HDFC Bank Ltd. (HDB) has created a head and shoulders topping pattern in the months since. The "official" pattern breakout occurred on April 17 when the price broke below the pattern neckline near $57.50. It's not too late for a short though. The original entry point remains an option, but also watch for a drop below $56.44. That is current support for a consolidation which has been in effect since mid-April. Given the broader bearish tone, if the price breaks out of that consolidation to the downside, the target is $50 to $49. The outlook remains bearish as long as the price stays below $60.92, the April swing high.
Valero Energy Corporation (VLO) is also sporting a head and shoulders topping pattern. The breakout (lower) for this pattern occurred on April 30 when the price dropped below $57. The next three trading sessions all closed above this mark. If the price drops to $57 again, it's still a valid entry point. The price target for the topping pattern, if the price continues lower, is $50 (based on approximate height of pattern, subtracted from breakout price). The long-term trend is still up, but the short-term trend is down. The price will need to rally above $60.77 (late-April swing high) in order to bring the bulls back into this one.
While Valero, an oil refiner, is potentially topping out, oil driller Transocean Ltd. (RIG) is potentially putting in a bottoming pattern. The push above $18.60 on April 30 completed an inverse head and shoulders pattern, providing an upside price target of $25.50. This stock has lost more than a third of its value since trading above $55 in November 2013, so even a rally to $25.50 doesn't necessarily mean a long-term trend reversal is underway.
Given the long-term downtrend, this inverse head and shoulders pattern could also be viewed as a large consolidation. In that case, a drop below $16.25 (late-April swing low) opens up the possibility for a decline to the March low of $13.28, or even lower if the downtrend resumes.
The Bottom Line
Chart patterns are a good introductory trading method (see How to Spot and Screen for Chart Patterns Using Finviz). They provide entry points, and by adding or subtracting the height of the pattern from the breakout price a profit target can be found. Use a stop loss order to keep the risk on a trade to less than the profit potential. Chart patterns don't always work. False breakouts may occur, or the price may not reach the desired profit target. Since losing trades occur, only risk a small percentage of your capital on any single trade.
The author doesn't have interests in any of the stocks discussed in this article.