Looking at Bow Energy Intra Day today I noticed a clear break of a short term ascending triangle – the breakout level was $1.35 for intra-day trading. Also below – find an article on the chart pattern I wrote some time ago.
The psychology of markets can be identified by looking at specific patterns in price. The theme is not new and technical analyst’s have been trading the markets successfully for decades picking reoccurring patterns that identify what the crowd is doing. Early examples include the ballroom dancer Nicholas Darvas who was made famous for his development of the Darvas Box used to trade stocks breaking from a consolidation zone, and Ralph Elliot who is renowned for developing Elliot Wave Theory that aims to identify the stages of market cycles. These are true market theorists who developed ground breaking principles that we all now have the benefit of applying.
Over the coming weeks, we’ll discuss price patterns, technical indicators and the predictive advantages they can have. We’ll kick off this week with a look at Ascending Triangles which aim to pick stocks in an uptrend that have taken a breather or paused for some reflection. It’s important that we understand the psychology behind a pattern to get in tune with the markets. An Ascending triangle is quite simple to understand but first let’s look at an example; Extract Resources (EXT).
From December 2008 we saw a significant run up in EXT from below $1 to a peak of $5.40. A couple of points on the rally. Volume was building throughout the run with a significant spike towards the end of the rally. Had you held a position in this stock, watching the fall in volume over the last three days of the move would have given you a clear indication that the rally was about to falter.
As the rally faltered, we saw a volume spike on a large down day as traders scrambled to get out at any price after seeing their open profit erode. One analogy that is often used in the markets is penguins following each other off the ice shelf. In this example however the volume and aggressive nature of the sell off didn’t last long as new buyers (who may have missed the rally entirely or could of possibly sold out earlier predicting a pull back) found value in EXT at $3.50 (just after hitting $5.40), this supported prices pushing it back up to the high around $5.40.
Those trader’s who failed to get out last time, took this opportunity to get out second time around. This occurred twice before a break occurred on the third time. A break occurs when there are more buyers in the market than sellers, with the buyers prepared to pay more for the stock. There was a couple of days of indecision before momentum really kicked in and volume intensified. Note; Its important to look towards volume to underpin the move higher. Like other patterns in the market, we’re not looking for perfection, but rather a pattern that has the likely hood of occurring time and time again.
See below some additional examples of the ascending triangle in action.
Stock; Karoon Gas (KAR)
Buy; Triggered on a break of $8.00
Stop; Two or three day low – below the breakout level. Alternatove stop could be 2 X ATR
Target; determined by the depth of the pattern. In this case, $2.50. Implied target of $10.50