BHI - descending triangle / overbought

BHI

Descending Triangles

While going through a number of ETFs today, one pattern kept emerging - descending triangles. Below is a 30 day chart of XLE but you'll find that many look similar (XLF, XLP, XLY, and non-ETFs as well)

For those still looking for a tradable bounce this is good news. Using XLE as an example, it closed near the baseline of its descending triangle pattern...meaning you could go long, set a tight stop under the baseline, and have a low-risk trade setup. That said, descending triangles usually resolve themselves in the current direction of the bigger trend so be quick to take profits.

For an intermediate term trade, or a more conservative trade, wait to get short on a breach of the price pattern's baseline, with a stop above it.

Triangles

For a precursor on triangles, click here.


AKS - ascending triangle

CELG - symmetrical triangle

MMM - descending triangle










Trading for a Living
Valid breakouts occur during the first two thirds of a triangle. It is better not to trade breakouts from the last third of a triangle. If prices stagnate all the way into the apex, they are likely to remain flat. A triangle is like a fight between two tired boxers who keep leaning on each other. An early breakout shows that one of the fighters is stronger. If prices stay within a triangle all the way into the apex, that shows that both boxers are exhausted and no trend is likely to emerge.

How to bet on the future of agricultural commodities

A dark cloud has been forming over DBA since mid-March but it's not too late to profit from its recent decline. First, what is DBA?
DBA - seeks to track the price and yield performance...of the Deutsche Bank Liquid Commodity Index... The index is ... composed of futures contracts on some of the most liquid and widely traded agricultural commodities – corn, wheat, soy beans and sugar. The index is intended to reflect the performance of the agricultural sector.

Second, if you aware of any fundamental reasons why corn, soy, wheat, etc. are going to the moon please ignore the following trade. This suggestion is based on the technicals - which, of course, already has the 'fundamentals' priced in and is reflected in the chart below.

DBA has presented a setup. It has formed a nice descending triangle pattern and it is trading at the base of said triangle. The setup is done, so the next step is defining some entry / exit criteria to minimize risk and maximize profits. Assume Puts are being used for this strategy.











Use the following as a guide:
1) Place a contingency buy order around 35.25 (meaning the breakout has occurred, thus validating the pattern). The contingency order says that when the stock price hits x, a market order will be triggered to buy Puts at the market. Buying ATM or OTM Puts is up to you.

2) Define a target. This is done by measuring the vertical height of the triangle (5ish) and applying that length to below the breakout level. Accordingly, the target is 30ish.

3) Define exit criteria (assuming the order gets filled). First, it's likely that the stock (once it breaches the base of the triangle) will decline a couple of percent, then bounce back to the base (support becomes resistance) and ultimately continue back down. This is what SHOULD happen but since things often don't happen as they should, stops are necessary. The whole purpose of using these contingency orders is to make the stock's direction prove itself before you jump on board (and so that you don't miss the move).

4) Place an order to sell, contingent upon the stock reaching 5% above the triangle base. In this case, 37ish. If the stock hits this level, you misread the pattern and it's time to get out. The order will be triggered, contingent upon the stock hitting 37, and your Puts will be entered as a 'sell to close' market order - cut your losses.

False breakouts do occur so it's important to get out of the trade when it goes wrong. If your criteria to enter the trade was based upon this pattern, then if the pattern is breached, you no longer have any reason to be in the trade - except hoping things turn back your way...and they won't.