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So last time I wrote about perfect technical break outs to new highs which is one of the setups I most regularly trade. Today I will go deeper into the ascending triangle setup, another setup that I often trade that prepares a stock to break out.
An ascending triangle is a triangle made visible with trend lines on the chart. It is a bullish setup that indicates accumulation which prepares the stock to go higher.
It is formed when a stock has found solid resistance that has been tested several times, but it couldn’t break out yet. On the low end of the chart it has found support that is gradually up-trending. So every time it gets up to it’s resistance but can’t break it drops back, but the low before the bounce starts is at a higher price every time. From these lows you can create an up-trending support line.
If you draw both the horizontal resistance and the up-trending support line you’ll see it form a nice triangle on the chart.
I’ve tried to visualize it in a clean drawing (stole this great idea from InvestorsLive Textbook Trading DVD). This gives a better view of the actual setup I’m looking for instead of cluttering it with real charts.
You see the stock trading between the horizontal resistance and support line. The support line is up-trending as the stock finds higher support after every dip. The triangle is closing itself which will cause the stock to break out eventually.
The difference between supply and demand of the stock is getting closer to each other, When the demand is bigger than it’s supply the price will rise up to the point where supply and demand meet, that’s where the resistance is found.
Than the supply will increase as more traders are selling their position at this price level. The supply gets the overhand of the demand and the price will drop to the point where the demand meets the supply again, it has found support.
By an ascending triangle the point where demand will meet the supply is getting higher every time, meaning that there is an increase in demand for the stock over time. Eventually all the sellers that are willing to meet demand at the current resistance price are bought out and the stock is breaking out.
An ascending triangle often occurs after a drop of the stock price. Than it wants to go higher on upcoming events, news, earnings or just because the market thinks it is punished to much with the recent drop.
There are still many traders holding positions that are trying to minimize their losses or get break-even. This forms the strong resistance that is the top of the triangle. When all the old bitter traders have sold their positions the way up is clear and the break out of the ascending triangle will set in.
HOW DO I FIND ASCENDING TRIANGLES
I haven’t found any screener up to now that I really feel gives me the stocks that are in an ascending triangle. Feel free to let me know if you know one!
So I mainly look at the charts when I build my watchlists and have to decide whether I see an ascending triangle opportunity myself. The easiest way to see if there is a potential ascending triangle setup is to see if there is a solid resistance line. If there is I take a closer look at the chart below the resistance line and see if I can find an up-trending support line.
If that is also the case I might be on track to have found another great play. I put the ticker on my research list and save the chart for further review.
PERFECT ASCENDING TRIANGLE
The following chart is a perfect example of a stock getting ready to break out it’s ascending triangle. You can see a solid resistance line at 0.70. I’ve chosen to draw this just above the real resistance price of 0.68 as 0.70 is a round number which could cause for another resistance when it wants to break out. So to be sure to look at the most optimal price I’ve drawn it at 0.70.
The support line starts beginning of 2014 and is tested again early Februari. You see that it only really tested it twice, as the dip after the last test of resistance couldn’t even go down that much to touch the support line. Talking about a bullish sign!
On this day it already tried to break out but got back to 0.71, closing just above my resistance line. Which was a buy signal for the next day if it could open strong. When you look at the number of shares it traded on this day you see that this is about 3-4 times as much as the days before. So there is an amazing increase of interest for this stock. Perfect setup to buy into the close for a possible gap up, but most certainly to profit from the break out it started.
The day after it did have a dip under the 0.70 resistance line, but it still closed green with a nice profit on the first day of the break out.
The second day it really broke out and pushed all the way up to over $1.00. It managed to immediately break through 0.90 resistance without hesitation.
This break out of it’s ascending triangle would have been a nice 30ct/share profit or 30% in just 2 days.
NOT PERFECT BUT VERY PROFITABLE CHART
It doesn’t always have to be perfect, as you see here with $ROX. This one doesn’t have a multiple tested support but still it looked good to me. It has a solid resistance apart from one break out in between. The support line I’ve drawn shows a good enough up-trending line.
I checked it out on Twitter and found that there were more traders interested in this stock, which could help it break out it’s resistance.
For me this was a potential buy if it could break through it’s 0.90 resistance level the next day.
It gapped up over the 0.90 resistance level, which was an instant buy signal. Although it had a small intra-day pullback it managed to hold 0.90 as it’s support which was a strong sign that it would continue it’s break out. It closed around the high of the day and near resistance from half November around 1.10ish.
The last candle on the chart shows the real break out, it gapped up over the last resistance at 1.10. Although it had a small dip back the the previous close is still was able to break out up to 1.35, making a solid 25% profit on the day.
From the buy signal the day before at 0.90 up to it’s high of 1.35 there was 45ct/share or 50% reward on this chart with support around 0.80ish or 10ct/share. I gladly risk 10% to be able to make 50% in just 2 days.
On the two examples I showed you see that it took 2 days to really break out the ascending triangle. It is often the case that it will need a few days to lure other traders in. Most of them are getting interested when the breakout already occurred as it pops up on their screeners. They want to profit from the ride higher and this helps the stock break out even higher.
Be sure to take your profit on time, because it can easily drop back down to it’s earlier resistance. If it does so and now holds it as support it might be a new potential buy for the rest of the uptrend. But at that moment I’m mostly looking at new charts that I feel most comfortable with.