Sunday, June 15, 2008

Chart Education Part 2 ~ Symmetrical Triangle ~ Google

Symmetrical triangles don't seem to have a lot of sex appeal, but they do seem to be appearing in several of the stocks in my portfolio, so I have decided that this is the next pattern that I will spend some time studying. The information in this post comes from my copy of Encyclopedia of Chart Patterns by Thomas Bulkowski.

A symmetrical triangle is formed when the stock moves within a trading channel forming higher lows and lower highs as it progressive, giving a top trend line that is angled down, and a bottom trend line that is angled upward. Unlike some of the other patterns that I have studied, confirmation does not occur when the price paces a certain point. Confirmation occurs when the price touches the trend line at least twice on the top and twice on the bottom. By that criteria GOOG is already in a symmetrical triangle pattern, and we are waiting for the breakout. Also the price must cross the triangle several times, covering the white space.

Volume pattern tends to have a downward slope to it. I've drawn a line on the volume portion of the graph that is sloping downward, but it has only has 8 points actually touching the line. The last few days have volume going over the line. Look for trades with heavy volume on the breakout for maximum reward.

Breakout direction can be in any direction, including horizontal, but 54% of the time it will follow the prevailing price trend, which in the case of Google is upward.

Minimum length for a symmetrical triangle is 3 weeks.

Failures: When the price moves less than 5% and then returns to the triangle and then breaks out in the opposite direction, the move in the new direction is likely to be large. These failures occur just over 1/2 the time. Look for resistance/support (depending on breakout direction) before initiating your trade.

Before pronouncing a chart a symmetrical triangle look to the left. A mirror image may be a diamond top or bottom formation. Another minor high to the left of the triangle could be a head and shoulders formation. Both are more powerful formations, so make sure not to miss them.

On average, this pattern gives a 31% rise or decline, and 1/3 of the time you will get a 45% rise or decline.

As with EEDT, busted symmetrical triangle breakouts actually perform better. If you get a pull back after 5% or less move in one direction or the other, and then the price breaks out in the other direction, you definitely want to play that movement.

To get a conservative target price, subtract the price of the lowest low from the highest high in the formation and then add or subtract that to your breakout price. A higher target can be measured by adding the price at the start of the move leading up to the formation to the lowest low, and then subtract that from the highest high in the formation. Since the former measure is easier, and more likely to be fulfilled, I will use that one.

Symmetrical triangles are good for intraday trading. Buy near the support line, sell near the resistance until break out occurs. Since I like to channel trade, it is helpful to be able to recognize these patterns so I can cut my loses when I end on the wrong side of a trade.

Now, lets get down to the nuts and bolts of this Google chart.


The first step is to identify the pattern. We see that GOOG has a symmetrical triangle confirmed as it has four touches to the top trend line and three touches to the bottom trend line. They are in the formation of lower highs, and higher lows. The price has crossed the pattern completely 4 times, and is on it's 5th leg in the upward direction.

While we can see a breakout in either direction, the overall look of the GOOG chart points to a slightly better chance at the higher break out. Combining the pattern with my resistance levels from Stock Consultant, I will call an upward breakout at 587 on the current pattern. While I am not expecting a downward break, I will be on watch for it below 543. Note that the longer that GOOG stays in this pattern, the closer the two break outs come to each other (since we will continue to make lower highs and higher lows until the break occurs). I watch the chart daily so I will adjust potential breakout watches as necessary.

Our target measure will not change from now until the breakout, so we can calculate it by subtracting our lowest low from our highest high.

602.45-524.77 = 77.68

Using our current breakout watch numbers, we can conclude that an upward break of the pattern at 587 would give us a target of 664.68. A break downward at 543 gives us a target of 465.32.

Concentrating on the more likely break upward, we have some resistance areas we will need to overcome. First is 600. That is a big psychological resistance to get through. It shouldn't be a surprise that 602.45 is the high point of our pattern. Next is our 5% failure number, which happens to correspond with the triple top confirmation point from January. The pattern will bust if we can't push through to 613.00 without a throw back. If it fails here, we will need to keep a close eye to see if it breaks downward. A lot of money could be made on puts if this pattern was to fail. Next we have a psychological resistance at 650 which corresponds to the double top confirmation line at 652.50.

Referring to stock consultant though, the only resistance they show between the breakout at 587 and conservative target of 665 occurs at 640ish.
This is good news for our chart.

So, my watch points for an upward breakout are

1. 587
2. 600-605
3. 615-620
4. 640
5. 665

Go Google Go!

Always perform your own due diligence before making any investment.

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