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Most of my screens focus on fundamental analysis.
Today, I want to put the focus on technical analysis, specifically on chart consolidation patterns.
Different chart patterns can be classified into one of two categories: continuation patterns and reversal patterns.
Continuation Patterns generally will continue in the direction of the trend. If the trend was up, and then pauses, the expected breakout would be to the upside. If the trend was down, the ensuing breakout would likely be to the downside.
Reversal Patterns have a tendency of reversing the trend. These consolidation patterns can signal a reversal in both uptrends and downtrends as well.
Different patterns have different names for them, like Symmetrical Triangles, Ascending Triangles, Head and Shoulders, and more.
But what they all have in common is that they are areas of indecision. The market pauses, and trades in a sideways-type pattern, until there's a catalyst to push prices meaningfully higher or lower in either direction.
The catalysts could be one of many things. The important thing to know is that many of these patterns have high forecasting probabilities. And understanding what they mean can help traders and investors get properly positioned in anticipation of the breakout.
One of my favorite patterns to trade is the Symmetrical Triangle. These are continuation patterns.
Below is an illustration of what a symmetrical triangle looks like.
Today, we're going to focus in on a bullish pattern.
The science behind this pattern is quite simple. The market has gotten a little ahead of itself and it needs to consolidate. Attempts to push higher are met with selling. And attempts to push lower are met with buying. Each new lower high and higher low is shallower than the last, until the chart pattern takes the shape of a right-sided triangle.
Eventually, the triangle resolves itself, and often with an explosive move in the direction of the preceding trend.
Screening for Symmetrical Triangles
To screen for symmetrical triangle patterns, first define the size of the pattern by the length of time it took to develop. For example, a one-month pattern, or a two-month pattern, etc. Then put in the logic.
Here are the parameters for a 3-month long bullish symmetrical triangle pattern.
- Moving High over last 90 days greater than Moving High over last 60 days
Specifically, this finds stocks whose high price between 90-60 days ago is greater than the high price from 60-30 days ago. This means the first high (point 1 of the triangle pattern) will be higher than the second high (point 3) of the pattern. This 'creates' the top part of the pattern and would be where the descending trendline would be drawn.
- Moving Low over last 90 Days less than Moving Low over last 30 days
This will find stocks whose low price within the last 90-60 days ago is lower than the low price from 30 days ago. This means that the first low (point 2) of the pattern will be lower than the second low (point 4) of the pattern. This would be the bottom of the pattern and where the ascending trendline would be drawn.
And to make sure your first high point isn't lower than a higher high shortly before that, I'll often add this other expression in:
- Moving High over last 150 Days less than Moving High over last 90 days
This means that the high price within the last 150-90 days will be lower than the high price within 90-60 days ago. In short, this helps me find stocks with patterns forming near their recent highs and precludes those following a meaningful drop.
This simple screen will find stocks that are in uptrends and that meet the characteristics of a 3-month set-up for a Symmetrical Triangle pattern. To search for smaller patterns over a short-time span, simply shorten the dates. To look for larger patterns, open the date ranges up.
Note: not every stock that comes thru this screen will look like a perfect symmetrical triangle, even though they technically meet the requirements. But it'll put some great looking charts on your radar screen. And that's what it's meant to do.
This screen is also available in the Research Wizard so you won't need to set this up as it's already in there.
Here are 5 stocks from this week's screen (7/12/11):
- Analyst Report
Edwards Lifesciences Corp.
( ENSG - Snapshot Report ) The Ensign Group, Inc.
( MDCA - Snapshot Report ) MDC Partners, Inc.
VRX Valeant Pharmaceuticals International, Inc.
( WGL - Snapshot Report ) WGL Holdings, Inc.
All of these stocks have bullish symmetrical triangle patterns on their charts. And for good measure, they're all Zacks #1 Ranks (Strong Buy) and Zacks #2 Ranks (Buy).
To search for chart pattern set-ups with the best fundamentals, download your free trial to the Research Wizard today. You can do it. Learn how, today.
Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Disclosure: Performance information for Zacks portfolios and strategies are available at: http://www.zacks.com/performance.
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