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Fun With Shapes

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Squares are rare in the market. Circles are traced from time to time. But triangles, yes triangles, are found often.

A triangle is a consolidation pattern found on point and figure charts. The pattern is formed when a stock trades in a narrowing range, marked by sequentially lower highs and higher lows. The pattern reveals indecision on the part of market participants and typically portends a substantial move in the direction from which the asset breaks from its triangle. (A triangle on a point and figure chart is similar to a neutral wedge on a bar chart.)

The recent weakness in the tech sector has caused several stocks to breakdown from their triangles, resulting in a host of bearish triangles. Here are a few we've been following and how their breakdowns have progressed on the bar charts:

Celestica (NYSE:CLS)

Celestica traced its bearish triangle on February 5 with its print at the $40 level. Since then, the stock traded as low as $34.10 through today's session. Using a simple retracement bracket from relative low to high, a trader can monitor the stock's various levels of risk, helping to determine intelligent exit points after entering on the bearish triangle breakdown.

CLS - Daily


Communications chip maker PMC-Sierra completed its bearish triangle in yesterday's session with its print below the $19.50 level. The stock proceeded to trade as low as $17.85 through today's session for a quick trade that netted better than $1.50. The stock has rebounded through the time of writing along with the broader tech space, with the inflection point at $19.50 now serving as resistance. The first level of risk to the downside, provided by the retracement bracket, is at roughly $17.00.

PMCS - Daily


Altera is a chip stock that gave a bearish triangle sell signal today with its trade below $21. After the print at $21, the risk in the stock shifted down to the $19.50 level, again provided by the retracement bracket.

ALTR - Daily

The triangles we've seen in the market recently have been of the bearish variety. Given the increasing presence of bearish triangles in the tech sector, a trader might infer that tech as a whole is heading lower over the intermediate term.

The triangles are not sure bets. There's no such thing. But the pattern is highly probable. Moreover, as the Celestica example above demonstrated, it takes time for the pattern to unfold. In Celestica's case, it took about two weeks for the pattern to really begin working. We could see a similar sequence of events unfold in the other two stocks covered, both of which only recently broke from bearish triangles.

Eric Utley
Option Investor

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