My Chart of the Day is Lululemon Athletica (NASDAQ:LULU), which looks to be in a Topping Triangle or sometimes what is called a bearish wedge, a member of the contracting triangle family. To shed some insight on how LULU’s Topping Triangle pattern is formed and what I look for, I’ve given you a quick lesson on the pattern below, but in this video, I tell you exactly how to play LULU, which reports earnings Thursday – along with H&R Block (NYSE:HRB), Harry Winston (NYSE:HWD), Smith and Wesson (NASDAQ:SWHC) and Smithfield Foods (NYSE:SFD) – including entry points and exit points for LULU.
Top Triangles and Top Wedges are considered bearish signals that indicate a possible reversal of the current uptrend to a new downtrend.
Top Triangles and Top Wedges make up a group of patterns which have the same general shape as Symmetrical Triangles, Wedges, Ascending Triangles and Descending Triangles. The difference is that these formations are reversal and not continuation patterns. These patterns have two converging trend lines. The pattern will display two highs touching the upper trend line and two lows touching the lower trend line. Contrary to Triangle formations, Wedges are characterized by their boundary trend lines both moving in the same direction.
This pattern is confirmed when the price breaks downward out of the Triangle or Wedge formation to close below the lower trend line.
Volume is an important factor to consider. Typically, volume follows a reliable pattern: volume should diminish as the price swings back and forth between an increasingly narrow range of highs and lows. However, when the breakout occurs, there should be a noticeable increase in volume. If this volume picture is not clear, investors should be cautious about decisions based on the particular Triangle or Wedge pattern. (To learn more about this pattern you can click here)
Action: The trade is relatively easy because there is no guess work. You wait for the break and then short the back test. So, in this video, I walk you through step by step where that break is and when it should happen, along with where the entry should be on establishing a new position once the back test is complete.
I also include downside targets where profit should be taken if it triggers, along with where our stop should be if the pattern fails. After all, if from, time to time, we didn’t have some sort of pattern failure, then every technical trader would always have 100% winning trades, so we have to approach each trade with our game plan in that event.
Bottom line: With this setup, we are risking $2 to make a potential $18 a share with this classic pattern called a Topping Triangle.
In the video, I walk you through everything from start to finish. As a reminder, we need to follow the rules of “No Tickie, No Takie,” which simply means failure to break south out of this bearish topping triangle negates the setup, so wait for the break and back test!
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.