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Buying That Triangle

03/17/14 04:32:00 PM
by Koos van der Merwe

When a symmetrical triangle pattern appears, and the share price breaks out, do you buy?

Security:   STN-T
Position:   Accumulate

A symmetrical triangle is formed by a succession of price fluctuations each of which is smaller than its predecessor. By definition, it must have at least four reversal points after which a breakout may occur at any time in the triangle, before the apex is reached. The apex gives you an approximate time that the target suggested by the triangle should be reached. A breakout to the upside should be on a high volume. If volume is light, a false move could occur. Does that mean that when prices trace a symmetrical triangle such as the one in the chart of Stantec Inc. (STN-T) in Figure 1, you should buy shares?

Figure 1. Daily chart showing symmetrical triangle and Elliott wave count with target.
Graphic provided by: AdvancedGET.
The daily chart in Figure 1 displays the symmetrical triangle that has formed. The triangle is suggesting that the share price could rise to $104.21 (72.57 - 40.93 = 31.64 + 72.57 = 104.21) by April 3, 2014. This is a strong move which seems unlikely to be reached by April 3, 2014 but you can never tell. The Elliott wave count on the chart is suggesting a WAVE 5 target of $80.38 which seems far more likely. With the RSI trending upward, and with rising volume as the price rises, the share looks like a strong buy. Do note the PTI (Probability Index) which at 64 is strong, suggesting that the price should reach $80.38.

Figure 2. Daily chart showing the symmetrical triangle pattern and the JM Internal Band indicator.
Graphic provided by: AdvancedGET.
The daily chart in Figure 2 shows the symmetrical triangle, and the JM Internal Band indicator. The JM Internal Band indicator is a simple 15-period moving average offset by 2% positive and 2% negative. A break above the upper band suggests a buy signal and a move below the lower band is a sell signal, as shown on the chart. The chart shows that three days ago, the JM Internal Band indicator gave a buy signal, as the price broke out of the triangle.

After studying the two charts, I would be a buyer of Stantec Inc. on any correction, should one occur.

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.

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