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TRIANGLES


$OSX Ready For Breakout

08/04/10 12:16:30 PM
by Chaitali Mohile

After a long descending rally, the Oil Services Index looks like it could undergo a robust bullish breakout.

Security:   $OSX
Position:   Buy

The Oil Services Index ($OSX) plunged from 230 to 160 levels in a time span of one and a half months. The fall was steady and fast for this index. Technically, a weak trend could have been a possible reason for the sudden correction. In March and April 2010, the average directional index (ADX) (14) was below 20 levels, the buying and selling pressures reflected by the positive directional index (+DI) and negative directional index (-DI), respectively, were frequently converging. This indicated the weak trend and high volatility.

But as the downside journey began, the selling pressure increased and the ADX (14) surged above 20 levels in Figure 1, developing a bearish trend. Gradually, the trend developed stronger and the bearish strength indicated by the relative strength index (RSI) (14) also turned stronger. The moving average convergence/divergence (MACD) (12,26,9) slipped into negative territory. Thus, the rally was fully loaded with the bearish strength.

FIGURE 1: $OSX, DAILY The triangle is formed at the bottom of the bearish rally, and the downtrend is overheated; thus, $OSX is about to break out upward.
Graphic provided by: StockCharts.com.
 
Later, $OSX established support at 160 levels and initiated a fresh trend reversal rally. We can see that in Figure 1, $OSX formed higher lows and steady highs. The pattern looks like an ascending triangle at the lower levels. An ascending triangle is a bullish continuation pattern in an existing uptrend but in the downtrend the pattern is considered a trend reversal. Sometimes, the triangle also resembles a bearish flag, but in Figure 1 the flag is ascending, and hence, a bearish flag & pennant formation is ruled out. In Figure 1, the pattern occurred after the prolonged descending rally and in an overheated downtrend. Therefore, we consider the triangle to be a downtrend reversal.

The bullish breakout of $OSX would generate fresh demand. The ADX (14) is ready to move above 20 levels, indicating a developing uptrend, the RSI (14) has established support at 50 levels, and the MACD (12,26,9) has moved above the zero line in positive territory. Hence, the bullish breakout would definitely sustain at the upper trendline support. After the breakout, $OSX would meet a potential target of 185 - 160 = 25 (the length of the triangle) +185 (breakout level) = 210.



Chaitali Mohile

Active trader in the Indian stock markets since 2003 and a full-time writer. Trading is largely based upon technical analysis.

Company: Independent
Address: C1/3 Parth Indraprasth Towers. Vastrapur
Ahmedabad, Guj 380015
E-mail address: chaitalimohile@yahoo.co.in

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