Posted in
Technical Analysis
By: Tom Gentile
on March 28th, 2023
When it comes to analyzing a security, stock, or ETF, one can research the fundamentals of the company to see if there is enough good going on with it to encourage investors to buy it, which should in turn propel the security price higher.
Technical Analysis is another means to researching a security’s price and those that ‘chart’ try and find patterns on a chart (price chart, line chart, Japanese candlestick chart to name a few types of charts).
The pattern or patterns they look for are those that indicate the security may trade higher or lower, (even sideways if one wishes to pursue options strategies that can potentially benefit by a security trading flat / sideways).
When one sees a pattern that is deemed bullish or bearish they can either buy the stock if the anticipated future direction is higher. They can sell the stock short if the anticipated future direction is lower.
Options traders can consider bullish option trades for a security they believe will trade higher or consider bearish option trades for a security they believe will trade lower.
One tactic options traders try and accomplish with technical analysis is finding patterns that if they continue or resolve in a certain manner will not only move in an anticipated direction, but give them an idea as to how far the price move could go.
Triangle Pattern Technical Analysis
There are a few different type of triangle patterns; symmetrical, ascending or descending. The triangle pattern isn’t what will help determine a potential price move higher or lower so much as determining which way the security could move coming out of a triangle pattern.
A triangle pattern is formed by looking at a security whose price highs decrease or get lower while the price lows increase or trade higher.
The high are usually considered resistance and the lows are considered support.
These resistance and support lines are considered trend lines. Eventually the two trend lines converge and come to a point.
One can usually draw trend lines on a chart, either on their charting software or if one printed up the chart and drew he lines on the chart itself.
The triangle pattern to be discussed in this article is the symmetrical triangle. It is identified as such since it has neither a horizontal support nor resistance price level.
Instead both support and resistance are sloping up and down. Take a look at Figure 1.
Anticipating a Stock Price Move
In the above image on SPY the descending resistance and the ascending support are highlighted by the solid, green lines.
SPY is trading a price point that is close to being the actual tip or point of the triangle.
What one waits for is the security, in this case SPY, to break out of the triangle pattern. If it breaks above (and preferably closes above the descending resistance line), this would be considered a bullish move and the anticipated direction of trade would be up/higher.
If it breaks below (and preferably closes below the ascending support line), this would be considered a bearish move and the anticipated direction of trade would be down/lower.
At that point one can anticipate a future price move equal to the widest width of the triangle.
From the top of the descending resistance line to the bottom of the ascending support line it looks like a 25-point differential.
One would take the price of the breakout of the triangle and see what a 35-point move further in the direction of the break would be and makes that the anticipated price target.
App: Toms Option Tools
Market Insight articles may show images of lists of stocks meeting a variety of options parameters like Unusual Call and or Put activity or Expensive IV found on my app Toms Option Tools.
Other times I will have other charts may work to amplify my educational points.
Those options data lists, however, can be found on my app Tom’s Option Tools. Use your device to search up and download this app and get free access to the Morning Reports section of the app.
Other parts of the app are available at a premium subscription rate, but the Morning Reports Lists are yours free.
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