|Chart patterns are rarely perfect and traders must sometimes read between the lines. Although not picture perfect, Choice Point Software (CPS) formed an ascending triangle over the last few weeks and broke resistance at 39 with above average volume. The stock formed a low in January (black arrow) and the subsequent reaction lows were all higher (green arrows). Even though it was not possible to draw a trendline connecting all the lows, the higher lows showed buying pressure at higher levels and captured the essence of an ascending triangle.|
|Figure 1: Daily chart of CPS.|
|Graphic provided by: MetaStock.|
|As a bullish continuation pattern, the ascending triangle is dependent on a resistance breakout for confirmation. The equal highs around 39 showed overhead resistance (supply) from late January to March (red arrows) and capture the other half of the ascending triangle equation. With a sharp move in early April (blue arrow), the stock broke above resistance to signal a continuation higher. Based on traditional technical analysis, the upside projection is to around 42 (39 - 36 = 3, 39 + 3 = 42). This is just the initial projection and the trend should be considered bullish as long as the March lows (around 37) hold. |
Relative strength and volume confirm the breakout. The price relative, which compares CPS relative to the Nasdaq, bottomed in January and broke resistance in March (green arrow). The stock has been outperforming the Nasdaq for over two months. Also notice that the breakout in the price relative occurred two weeks before the actual breakout in the price chart. And finally, the breakout in the price chart was confirmed with above average volume.
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