AIG Breakout Gives Good Example of Trading Triangles

Sep 22, 2009: 1:32 PM CST

For those of you who missed it, AIG had a large breakout from a short-term symmetrical triangle which led to a sudden achieving of the ‘measuring objective’ or price projection target.  Let’s take a look at this triangle, as it serves as a great example of the “price consolidation and expansion” principle, as well as a near perfect ascending triangle trade set-up.

This chart shows the internal (30-min chart) for all of September so far.  If we looked further to the past, we would have seen a huge surge to the upside, and this is the consolidation period/phase after the upward impulse.

Keep in mind that AIG has risen from $12.50 in early August to $54 presently in September – that’s astonishing.  However, this post is focused mainly on recognizing and trading the triangle as seen above.

The ideal symmetrical triangle will form an obvious contraction in price range – which often is signaled by drawing two converging trendlines off price swing highs.  During this time, volume contracts as the triangle forms and price compresses further – reaching a “Value Area” (to use a Market Profile term).

This means that buyers and sellers are in ‘balance’ and are ‘comfortable’ with the established price (around $40 per share).  However, as we know, balance and perfection cannot hold in the stock market, so the smallest thrust (or impulse) out of the ‘value area’ can cause shorts to cover quickly, and simultaneously draw in new buyers, excited about higher prices… which causes more shorts to cover quickly.

As such, you get a one-sided (“positive feedback”) market as a virtuous circle (or vicious circle… depending on which side of the market you are on!) develops.

Without getting too deep into market pricing theory, let’s just say you want to be a buyer as the upper trendline is breached to play for the expected (though never guaranteed) price breakout move.  The move could have just as easily came to the downside, so it’s often best to wait until the market tips its hand before putting a position on.  A stop would go on the opposing side of the trendline.

The target is just a classical “triangle” target, which is to take the ‘height’ (or distance between the two highest points of the triangle) and add that to the breakout price (at $42).

The height in this case was about $10, so that gives us a target of $42 + $10 = $52… which price hit and exceeded today on the morning gap.  This would be your exit on the trade.  Markets have a tendency to find resistance (or support) at price pattern projections, as seen here so far.

Continue studying this pattern for additional insights that will help you the next time a similar triangle forms in your favorite stock or market.

Corey Rosenbloom, CMT
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Video: Two Technical Levels Collide Overhead in the SP500

Sep 22, 2009: 1:04 PM CST

Adam Hewison released a thought-provoking video yesterday entitled “Two Major Technical Levels are About to Collide in the S&P 500 Index.”

It’s an interesting and ‘larger picture’ style take on the S&P 500, noting an overhead descending trendline (which I missed drawing!  I miss some of the things that are so simple – Adam is very helpful in pointing those out in his analysis videos) and the 50% Fibonacci retracement – both of which converge overhead at 1,125.

Here’s an image from the video:

(Image links to the video page)

In a 5-minute video, Adam covers an overhead trendline, Fibonacci retracements, and cycles (noting that October 11th – the 2 year anniversary of the 2007 peak – is just around the corner).

In introducing his video update, Adam writes, ”

The S&P 500 has seen remarkable recovery from the lows that were seen earlier this year. However, all of that may come to an end as we fast approach a strategic level for this market. There are two major technical indicators that are colliding at a crucial point and time. Unless you’re aware of these indicators, it could be very expensive.

In todays short video, I explain both the technical indicators we are discussing and also the important time frame that we are just about to enter.”

That’s why I enjoy these videos – Adam covers simple points in quick fashion… in a video format as well.

Thanks to Adam and staff for making these videos available to us.

Corey Rosenbloom, CMT
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The Symmetrical Triangle in Exxon Mobil XOM

Sep 21, 2009: 1:35 PM CST

I mentioned earlier this morning that an “Ascending Triangle” was forming in Crude Oil prices (daily), but there’s been an even larger triangle forming on the price charts of Exxon-Mobil (XOM).  Let’s take a look at the weekly and daily structure.

We can draw loose trendlines starting with the 2008 highs of $92.50 and then off the October 2008 lows to form a consolidating triangle (symmetrical) as shown above.

Price is now coming close to the “apex” or convergence price (roughly $69/$70) of the triangle, which often produces a price breakout move one way or the other (according to the Price Expansion/Contraction Principle).

For now, the upper boundary is $70 (though I’d stretch it to $72.50 to account for the numerous moving averages and Bollinger Band boundaries/resistance overhead – price would need to clear all of those before one should be bullish) and the lower boundary is $67.

It would appear – looking at this – that the odds may seem to favor a downward break over an upward break, just looking at the EMA structure and current trend structure.

Let’s dip down to the Daily chart:

This is an internal or terminal triangle that takes into account the most recent price consolidation (converging trendlines as shown).

Again, we would need a break above $71 to get bullish or a break beneath $68/$69 to get bearish.  The momentum oscillator is also contracting in anticipation of a breakout.

Should Crude Oil prices fall from here (triangle break to the downside beneath $70 per barrel), then Exxon-Mobil (and other oil-related stocks) would almost certainly break to the downside as well (and vice versa).

For now, let’s keep watching these triangles in anticipation of a trend/impulse/momentum move that would emerge when these boundaries are broken.

Corey Rosenbloom, CMT
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Hear Corey and Larry Williams in new Disciplined Investor Podcast

Sep 21, 2009: 10:15 AM CST

In the latest episode of the Disciplined Investor Podcast with Andrew Horowitz, Andrew interviewed Larry Williams and myself in a discussion of the current markets, technical structure, and commodity market positions.

Entitled, “Episode 127:  Pro Lessons on Trading and Technicals,” Andrew, Larry, and I discuss what we’re seeing in the current market – Larry from a perspective of the commodity and futures markets and me on the S&P 500 and current stock market structure.

In introducing the Podcast, Andrew writes,

“Guests: Larry Williams and Corey Rosenbloom discuss trading and markets. We first hit commodities and futures and then discuss trends and resistance levels. If you want to know where the markets may be headed. This is a great episode to listen in on.”

You can download the Podcast from iTunes and take it with you on the road (link on Andrew’s page) or listen live on your computer now – both links are from Andrew’s introductory page (where you can read both Larry’s and my quick biography).

I was honored to participate with such a great market legend as Larry Williams and thankful to Andrew for this opportunity!

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The Ascending Triangle in Crude Oil Daily

Sep 21, 2009: 9:59 AM CST

Not to be outdone by gold’s lengthy triangle price pattern, Crude Oil has recently been forming its own triangle pattern as seen on the daily chart.  Let’s take a look and note the current triangle boundaries.

This chart was taken as of this weekend and the index in (for $WTIC) updates “end-of-day,” and as of this writing, crude oil futures are trading at the $70 per barrel level, so we’ve had some downward movement since this chart was created as part of this week’s 21 page “Intermarket Technical Report“.

The $70 area contains the lower trendline along with the rising 50 day EMA ($69.44) so keep a close eye on these levels for possible support.

The upper line of the triangle resides at the $75 level, which reflects the 200 week simple moving average (weekly chart) which has served almost like ceiling so far on price.

A negative momentum divergence has formed as price has wound its way to new marginal 2009 highs, so that is a bearish non-confirmation that has developed.

The obvious play would be to wait for some sort of price breakout – above $75 (target $80) or beneath $70 (target $60) to play for a ‘range expansion’ or ‘triangle break’ move instead of trying to predict in which direction the price expansion will occur.

Reference gold’s price quick expansion move when it broke above the daily symmetrical triangle in the last few weeks that set up a quick scalp trade for those nimble enough to play the breakout move.

For now, keep your eye on a break above $75 or a clean break beneath $70 in crude oil for a potential breakout play from the dominant triangle pattern.

To keep up with the Monthly, Weekly, and Daily structure and opportunities in 10-Year Notes (Bonds), S&P 500, Gold, Crude Oil, and the US Dollar, subscribe to our new Premium “Weekly Intermarket Technical Report” (released each Sunday evening for the week ahead).

Corey Rosenbloom, CMT
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