All day I scan the charts looking for technical patterns to trade. My Trending 123 Pattern Scan powered by Recognia is one useful tool I have to scan the markets quickly, and it is showing two polar opposite technical events in the intermediate term for these two business services stocks.
Bullish Symmetrical Continuation Triangle in Ellie Mae
Ellie Mae (NYSE:ELLI) is a company that provides software for the mortgage industry, and it has developed a bullish symmetrical continuation triangle pattern over the past 43 days.
A symmetrical triangle shows two converging trendlines, one is ascending, one descending, creating a sideways symmetrical triangle. The formation occurs because prices are making both lower highs and higher lows. Elaine Yager, Director of Technical Analysis at Investec Ernst and Company in New York and a member of Recognia’s Board of Advisors, notes that the pattern should display two highs and two lows, all touching the trendline.
This traditional volume pattern develops because of investor sentiment during the creation of a triangle. Investors are uncertain. This uncertainty means that they are buying and selling sooner, which translates into a narrowing of the highs and lows, creating the “coil” shape, indicative of the triangle . Because investors are uncertain, many are holding on to their stocks, awaiting the market’s next move. When breakout finally does occur, there’s a surge in market activity because investors are finally certain enough about the direction of the market to release their pent-up supply or demand.
A symmetrical continuation triangle can be a sign of a reversal or of a continued channel. An ascending triangle like this one is considered bullish. Traders are advised to wait a few days after the stock shows a breakout to make sure it will continue.
Recommendation: Go long ELLI. The stock closed at $21.62 yesterday and my scanner has identified a target price range of $32.00-$35.00.
Head and Shoulders Top in Rollins Inc.
Rollins Inc. (NYSE:ROL) is a pest removal company that has developed a head and shoulders top pattern over the past 23 days.
The Head and Shoulders Top is an extremely popular pattern among investors because it’s one of the most reliable of all formations. It also appears to be an easy one to spot. Novice investors often make the mistake of seeing Head and Shoulders everywhere. Seasoned technical analysts will tell you that it is tough to spot the real occurrences.
The classic Head and Shoulders Top looks like a human head with shoulders on either side of the head. A perfect example of the pattern has three sharp high points, created by three successive rallies in the price of the financial instrument.
The first point – the left shoulder – occurs as the price of the financial instrument in a rising market hits a high and then falls back. The second point – the head – happens when prices rise to an even higher high and then fall back again. The third point – the right shoulder – occurs when prices rise again but don’t hit the high of the head. Prices then fall back again once they have hit the high of the right shoulder. The shoulders are definitely lower than the head and, in a classic formation, are often roughly equal to one another.
A key element of the pattern is the neckline. The neckline is formed by drawing a line connecting two low price points of the formation. The first low point occurs at the end of the left shoulder and the beginning of the uptrend to the head. The second marks the end of the head and the beginning of the upturn to the right shoulder. The neckline can be horizontal or it can slope up or down. The pattern is complete when the support provided by the neckline is “broken.” This occurs when the price of the financial instrument, falling from the high point of the right shoulder, moves below the neckline. Technical analysts will often say that the pattern is not confirmed until the price closes below the neckline.
Recommendation: Short ROL. The stock closed at $24.11 yesterday, and my scanner has identified a target price of $22.80-$23.10.
InvestorPlace advisor John Lansing tracks the charts all day and offers expert technical analysis in his day trading, options and trading services: Power Trading at the Open, Parabolic Options and Trending123. For more information on which service is for you click here.