A triangle occurs when the price of a stock (or another asset) moves in a narrowing price range. The pattern shows indecision on the part of traders because a breakout indicates one side (bulls or bears) has established dominance over the other, and the price typically trends in that breakout direction for some time. Triangle patterns are watched by many traders and offer a favorable risk/reward ratio when trades occur.
Weyerhaeuser Co. (WY) has been moving in a triangle pattern since August. Resistance, based on the upper trendline, is at $32.38 and a rally beyond that could indicate further upside. The pattern is $3.51 in height, which added to the breakout point gives an upside target of $35.89. Given the strong uptrend earlier in the year, a breakout to the upside is more likely than a downside breakout. A downside breakout occurs if the price falls below the lower trendline at $30.72. That would signal a further slide to $27.21 ($30.72-$3.51). That target is still above the June swing low of $26.55, which is the next support level.
Suncor Energy Inc. (SU) has been moving within a triangle pattern since late April. The triangle was broken in mid-October when the price rallied above triangle resistance at $28.30. The height of the triangle is $4.59. Added to the triangle breakout point, the upside target is $32.89. With a breakout to the upside underway, a drop below triangle support at $25.80 is unlikely but would signal a further decline. When the price breakouts in one direction and then reverses course and breaks out of the pattern in the other direction, that's called a false breakout. If that scenario develops, the downside target is $21.21 ($25.80-$4.59).
Brunswick Corp. (BC) has been in a triangle pattern since late April. Triangle resistance is $49.80, although a daily closing price above $50 would add additional confirmation of an upside breakout. The pattern is $10.40 in height. Added to the breakout point of $49.80, the upside target would be $60.20. Since the pattern is large, the target is a good distance away, making this a potentially longer-term trade. Given the strong rally at the start of the year, an upward breakout is more likely than a downside breakout. A downside breakout occurs if the price falls below lower trendline support at $45.60. The downside target, in that case, is $35.20 ($45.60 - $10.40). That target is just slightly below the 2016 low of $36.05.
The Bottom Line
These triangles patterns were preceded by strong rallies, indicating an upside breakout is more likely than a downside breakout. That said, a breakout could occur in either direction. The height of the patterns provide an approximate price target when added or subtracted to/from the breakout points. Risk can be controlled by placing a stop loss just outside the opposite side pattern, or just below a recent swing low if going long, or just above a recent swing high if going short. The profit potential of a trade should always outweigh the risk, and triangles allow for that.
Disclosure: The author doesn't have positions in the stock mentioned.