Broadening Top on XLF Confirm and Completed

On Thursday December 8th this post up put up showing the bearish potential on XLF.  There was a broadening top that formed in ETF.  We wrote this:

In order for this pattern to break XLF would have to break $12.83 this would confirm a break of the bottom of the broadening top for it to be voided XLF would have to break 13.49.

Thursday when the market opened XLF dropped below the $12.83 level but on Friday came back up inside the Broadening top.  Then on Monday it dropped below it again and today the move was confirmed and hit its target. We set the price target via the information below:

Price Target: Currently this pattern has a price target of .40 cents, but this target can grow if XLF continues to make new highs and lows.  The price target for a Broadening Top is the distance from the highest high and lowest low.

XLF has now hit is price target for this move bouncing off its swing low of 12.45.  While the bearish move is complete one has to remember that the pattern above represents a bearish move and XLF could continue lower and that being bullish on this sector is not the best move right now.

The pennant Chase

The latest batch of chop in the market has formed a pennant. The pennant is created when the market is making lower highs and higher lows, coming together horizontally.  Or simple put the top of the wedge is descending and the bottom is ascending.

This pattern is considered a continuation the pattern develops after a sustained up move or down move.  It is a slow down before the trend continues again. These patterns typical will break the top of the wedge if the trend is up, and the bottom of the wedge if the trend is down. The pattern rarely will break to the opposite side and make a trend reversal but it is possible. 

These patterns can be confused with symmetrical triangles but the lengths of time can determine if it is a wedge or not. Typically wedges form in a shorter time frame then triangles. This wedge has formed over the last three weeks and meets the time requirement of the wedge.

Here is the Wedge on a short-term time frame.

Another key component to the wedge, is volume.  Volume must dry up during the creation of the pennant.  From this chart of the total volume for SpX, that volume has declined but it is still around the average and the lack of volume during the run up over the last few months, skews the current volume. 

Keep an eye on this pattern, a break could be a strong signal on where the market will go.  The odds say that the market will continue if the pattern breaks upwards, but there is always that chance it breaks down. 

Check out Stockcharts.com Chart School for me info on the pennant pattern.

Chart Pattern of the Week Descending Triangle

Here is a new feature for the site, each week there will be an example of a techincal chart pattern.

The triangle pattern is one of my favorite patterns to trade.  It provides a clear entry, a clean exit/target and its easy to spot.  For the pattern to be formed it needs to have a clear base that has formed over a few days and the stock also must be trending down towards the base.

Here is an example of a beautiful Descending Triangle:

The bottom was formed by the two reaction lows in Nov and Dec.  This formed a support level that would eventually form the bottom of the triangle.  The stock then failed to make a new high after bouncing off the support level in Dec the downtrend line was now established.  In the case of this stock, a tighter descending triangle formed. Either triangle was in play.

It is also important to notice volume, it should contract while the price remains in the triangle and volume should increase when the base of the triangle is broken.

The most important thing to notice here is how many times the stock attacked the support level. Here is a key rule in technical analysis "THE MORE A SUPPORT OR RESISTANCE LEVEL IS TESTED THE WEAKER IT BECOMES".

If you were a risky trader you could of shorted after seeing BPOP testing the 2.11 level.  The safe play was to short around 2.10-2.08 and set your stop at 2.12. 

Now that the bottom of the triangle is broken targets can be placed.  When it comes to a descending triangle, or any triangle a target is the size of the triangle.  The size of the triangle is measured from the base to the top of the triangle.  The target is the size of the triangle minus the break of the base.

So in this case, you can chose two targets the larger triangle is 2.63-2.11=.52  so then its 2.11-.52=1.59
Or you can use the smaller triangle and its 2.40-2.11=.29 so then its 2.11-.29=1.82

Here is more information on a Descending Triangle

If you want to learn about chart patterns check out INO.COM's TV, for the price you pay it is amazing the amount of information you get. Each video is informative and comes with a pdf to read along. You would have to spend thousands of dollars in books to get all the information that INO.COM has. CHECK IT OUT!

Update on Thursday, February 11, 2010 at 3:43PM by Pikertrader

Update: Just to follow up BPOP completed it's target in fact it went lower and hit 1.75.  This is why measured move chart patterns are great trading edges.