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Intel Corporation's (INTC) Upside Triangle Breakout

08/03/01 03:56:25 PM
by Jason K. Hutson

In the last three months, the narrowing price range on this security has been penetrated with a semi-significant price movement upwards while the daily volume has almost doubled.

Security:   INTC
Position:   Buy

Triangles are classic chart formations that can help traders determine whether a trend is on the verge of continuing or about to reverse. The triangle shape itself is formed by the convergence of two trendlines: an upper resistance line along the highs and a lower support line along the lows. Triangles come in a number of shapes, the more common ones being symmetrical, ascending and descending. Of the three, the ascending triangle can be particularly significant because it tends to appear somewhat less frequently than the other two. The ascending triangle, as its name suggests, is the most likely of the three to signal an upward movement in the security.

In the case of Intel Corporation (INTC), an ascending triangle appears to be forming, beginning in the spring of 2001 and looking to produce an upside breakout in late July. While it is true that an ascending triangle usually signals the continuation of the existing trend (ascending triangles in downtrends anticipate further declines, ascending triangles in uptrends anticipate further advances), these formations can also be found at the bottom of downtrends and, as such, suggest that a reversal is at hand. The ascending triangle has a horizontal upper trendline and a lower trendline that slopes upward (see chart). The upsloping lower trendline is indicative of more aggressive and more numerous buyers compared to sellers, as the lows steadily increase. At the same time, the highs repeatedly test resistance between 30.5 and 31.5.

An upside breakout from this ascending triangle may begin a turnaround for Intel.
Graphic provided by: MetaStock.
Ascending triangles are successful when prices break through the topmost, horizontal trendline before either of the two trendlines actually converge (note that the breakout occurs before the trendlines touch). At this point, Intel has just broken out of the formation, but has yet to test the new support line (resistance, once broken, often turns into support) in the form of a pullback to the topmost horizontal trendline. Prices could pull back or retrace to the upper trendline before resuming an advance, but should prices move back into the formation significantly, the trader should be alert to any further deterioration in any long position.

It should be noted again that although prices can break out from symmetrical triangles on either the downside or the upside, ascending triangles usually break out on the upside. This is important in this case because Intel's triangle appears at the bottom of a major downtrend (not shown). As such, the breakout in Intel would represent the first leg of a countertrend rally, and the appropriate precautions should be made.

Volume is generally heavy at the beginning of the ascending triangle formation and tends to contract during the development of the triangle formation, before increasing (often significantly) during the breakout. This price action signifies the inherent bullishness of the pattern: the big volume at the beginning of the formation announces the presence of strong buyers. The lack of volume as the pattern unfolds suggests that sellers, in large part, have abandoned the field to the buyers. The upside breakout, then, is in many ways a follow-up to the bullishness at the beginning of the pattern. Because of this, a tight stop could be placed near the topside trendline, just inside the formation. This would have minimized the risk for a LONG trade, allowing the trader to view the previous resistance line as a new support level. However, to avoid being "whipped" out of the position, a stop somewhat lower in the formation, at the point of the July lows (around 29) is an effective compromise between a stop that is too tight and one that allows for too much downside.

Jason K. Hutson Staff Writer. Enjoys trendlines, support and resistance, moving averages, RSI, MACD, ADX, Bollinger bands, parabolic SAR, chart formations, and volume analysis.

Title: Industrial Engineer
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Date: 08/07/01Rank: 5Comment: 

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