How to Profit from this Explosive Chart Formation
Tuesday, August 11, 2009 | Chris RoweRating:
I have been writing a series on "Delta" (not the airlines, but the "Greek" variable relating to options pricing), and I've received tons of great feedback from many of you, both privately and publicly. But this week, I will take a break and revisit an older article that I wrote about an explosive chart pattern that is easy to identify and profit from.
Reason: The last 24 hours of my life have just been ... well ... unexplainably horrific -- to the point where I swear there must be a very evil, supernatural being following me around, watching prank after prank unfold. I feel like I'm on "Candid Camera"!
Anyway, I decided the older article below is well-worth reading if you haven't seen it yet, as the information in it has made me, and many investors I know, millions.
Next week, I will continue talking about how to use and understand options in a way that will make YOU millions, as long as you play your cards right. (Be sure to brush up on the first four parts of the delta series here: Part 1, Part 2, Part 3 and Part 4.)
In fact, before you read the article on the explosive chart pattern below, take a look at one e-mail I received from a Tycoon Report reader regarding delta:
Dear Mr. Rowe,
"I want you to know you saved my financial life, and you did it for free. I have 3 daughters and 2 sons. I read your original three-part series on Delta a couple of years ago. I turned my $360,000 into almost $600,000 -- not because I had huge winners, but because you showed me how to reduce and limit my losses when I was wrong. I would probably have lost 40% of our money in the crash if not for understanding delta. My Family Thanks You!"
Ricardo G.
Walhalla, S.C.
Now ... on to 'How to Profit from this Explosive Chart Formation'
Today (this was originally published April 21, 2008), I recommended a trade to members of The Trend Rider that jumped almost 8% higher by the end of the day. I think the position will explode to the upside by another 50% soon.
I want to show you how to discover explosive opportunities by finding the same kind of chart formation.
Among many other criteria that I look for, the stock (represented by the green line) had a strong chart pattern called the Symmetrical Triangle.
The Symmetrical Triangle is usually a "continuation pattern." So, whatever direction the prior trend was, is most likely the direction in which the stock will break out (if the prior trend was up) or break down (if the prior trend was down).
There are two other popular triangle patterns that I won't get into now (but are powerful in their own right) called the Ascending Triangle (typically found in uptrends) and the Descending Triangle (typically found in downtrends).
But the Symmetrical Triangle is neutral, and is found in downtrends as often as it’s found in uptrends.
There are two trendlines (black lines) that form the Symmetrical Triangle: One sloping up, and one sloping down. Again, the green line represents the stock.
To form the Symmetrical Triangle, we draw two converging trendlines, and each is touched twice. The upper trendline can only be drawn after the stock has made a second peak lower than the first (blue dots).
The lower trendline can only be drawn after the stock has made a second low higher than the first (red dots).
So, altogether, there are at least four reversal points.
When you draw the triangle’s trendlines, use the closing prices -- NOT the intraday prices. A breakout or breakdown occurs when the stock closes above or below the trendline.
The wide left side is called the “base,” and the point on the right side is called the “apex.”
Breakout/Breakdown
Once you are able to draw the two trendlines, you will know exactly where the two lines would meet. Remember -- prices should break out or break down by about two-thirds to about three-quarters of the horizontal width of the triangle.
If the breakout doesn’t happen by three-quarters of the horizontal distance through the triangle, then the pattern loses its potency. It’s also more likely that the sideways trend continues until something new occurs.
Volume
Volume should be heaviest at the base, and should gradually decline as the trading range narrows. A sudden burst of volume should confirm the breakout or breakdown.
Usually, you can find clues in the price volume action leading up to the breakout or breakdown. This can help you determine the likelihood of a continuation, and it can give you the alert that the big move is just about to occur.
Typically, you’ll see volume pick up slightly right before the big move. But, compared to the volume activity leading up to it (because volume should “dry up” through the triangle), the volume is noticeably higher.
Estimated Minimum Price Objective
The minimum price objective is the vertical distance of the widest part of the triangle (the base). In the chart above, this distance is indicated by the orange arrows. If the distance was 10 points, then look for a 10-point advance/decline once the trendline is penetrated (in terms of the closing price).
Remember, whenever I say “minimum price objective,” I mean exactly that: “minimum.”
Prices can move much further than that, and usually do when strong volume on the trendline penetration occurs. Always consider past key support or resistance levels to stop the advance or decline -- or, if they are penetrated, for that advance or decline to continue.
Return Test
Once the breakout occurs, the support or resistance levels are found at the stronger trendline. In other words, if the breakout is to the upside, then the upper (descending) trendline was the one that was broken. So, the lower (ascending) trend line acts as support.
You’ll find that, quite often, there is a return back to test that trendline. If the breakout is to the downside, then the lower (ascending) trendline was the one that was broken. So, the upper (descending) trendline acts as resistance.
Often, there is a return back to test that trendline.
The return test is what I believe gave me my opening to recommend the stock I liked at a great entry point. After the upside breakout (on heavy volume) past the upper trendline of the triangle, I was blessed with a pullback to just above that upper trendline. This is normal. And sure enough, the old resistance level acted as new support, and our trade was immediately off to the races.
If you think you see a stock with a Symmetrical Triangle formation unfolding, leave a comment about it by clicking the "post a comment" button below. Either I will comment on it (depending on the number of Symmetrical Triangles that people talk about), or another reader may want to add his/her 2 cents about profiting from this powerful formation.
(Please let us know what you think about Chris Rowe's article.)
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“Profit from the Trend”
Chris Rowe
Chief Investment Officer
The Trend Rider
