Investing with Ascending Triangles

The Ascending Triangle is a chart pattern which forms as a stock trades in a contracting trading range. The stock rallies up to a resistance level and then sells back down but the lows of each successive sell down are higher. This means that the lower boundary of the contracting trading range slopes upwards.

The Ascending Triangle indicates that buyers are dominating the market. With each subsequent sell down the sellers are not able to sell the stock down as far. Trading resistance breakouts is a popular strategy with stock traders as the resulting breakout can lead to a strong rally.

The same techniques can be applied to investing. The investor can increase their chances of a profitable investment by applying the trading principles to a long-term chart. The charting analysis can be used to supplement any fundamental analysis that the investor has performed.

The weekly chart for Wright Medical Group NASDAQ:WMGI shows how the stock formed an ascending triangle over a nine month period. WMGI has started a new uptrend with the 52-week moving average sloping upwards.

Chart 1. Weekly chart for WMGI

weekly Chart WMGI

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Generally it is a good idea to view a longer term chart so that the investor gets a sense of where the stock has traded in the past.

A long-term monthly chart for WMGI is shown below which shows how the stock has started a new uptrend.

Chart 2. Long-term chart for WMGI

monthly Chart WMGI

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The monthly chart above shows how WMGI has traded since 2001.

WMGI trades up to over 36.00 to its all-time high in 2004. The stock then sells down to bottom in 2006 before rallying again but this time the high falls short of the all-time high set in 2004. After some reluctance WMGI finally collapses with the 2008 financial crisis and its stock price is driven down to an all-time low of around 11.00. The stock then rallies slightly before pulling back in 2010 and then starts a new uptrend during 2012 where WMGI is currently consolidating with an ascending triangle pattern. As the charts show, WMGI has just broken through the resistance of the ascending triangle pattern and the stock looks set to rally.

Chart 3. below shows how WMGI performed after the breakout from the ascending triangle. The stock price increases 40% over the next 17 months.

Chart 3. Weekly chart for WMGI

monthly Chart WMGI

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The more active investors might use an initial stop and even a trailing stop. Some investors only use an initial stop and will hold the stock as long as it has a capital gain. A trailing stop will generally stop the investor out before the stock has made any large gains. Some investors only use charts to supplement their fundamental analysis and do not use stops.

For investing purposes the initial stop and especially the trailing stop need to be quite loose. If the stops are too close to the current price action then the investor will be prematurely stopped out.

The initial stop could be placed at around 19.00 which is below the lower boundary of the symmetrical triangle.

Charts make a great investing tool and are a good supplement to the fundamental analysis performed. The advantage of incorporating charts into the decision making process is that the investor has a visual sense of how the stock price has performed historically.

Chart 4. below shows the stock’s price history with the maximum data available.

Chart 4. Maximum price history for WMGI

monthly Chart WMGI

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The maximum price history chart shows how the stock has performed since 2001. An initial investment of around $1,000 would be worth around $1,900 today.