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 similarly named, but polar opposite technical events for these two insurance stocks.
Bottom Triangle
Click to EnlargeCNinsure Inc. (NASDAQ:CISG) is a Chinese insurance company that has developed a bottom triangle pattern over the past 176 days.
A bottom triangle (sometimes known as a bottom wedge) is considered a bullish signal, marking a possible reversal of the current downtrend. The pattern has two converging trendlines with two highs touching the upper trendline and two lows touching the lower trendline.
This pattern is confirmed when the price breaks upward out of the triangle/wedge formation to close above the upper trendline.
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 this triangle/wedge.
Recommendation: Buy CISG at current levels (~$6.40) for a target price range of $8.90 – $9.50. Set a stop at $5.52.
Top Triangle
Click to EnlargeInvestors Title Company (NASDAQ:ITIC) is a holding company for Investors Title Insurance Company and National Investors Title Insurance Company. The stock has developed a top triangle pattern over the past 26 days.
A top triangle (sometimes known as a top wedge) is considered a bearish signal, indicating a possible reversal of the current uptrend to a new downtrend. The pattern has two converging trendlines with two highs touching the upper trendline and two lows touching the lower trendline.
This pattern is confirmed when the price breaks downward out of the triangle/wedge formation to close below the lower trendline.
Technical analysts pay close attention to how long the pattern takes to develop to its apex. The general rule is that prices should break out – clearly penetrate the lower trendline – somewhere between three-quarters and two-thirds of the horizontal width of the formation. The break out, in other words, should occur well before the pattern reaches the apex of the triangle/wedge. The closer the breakout occurs to the apex, the less reliable the formation.
Investors should see volume decreasing as the pattern progresses toward the apex of the Triangle/Wedge. At breakout, however, there should be a noticeable increase in volume.
Recommendation: Short ITIC at current levels (~$66.90) for a target price range of $57.25 – $58.75. Set a stop at $70.87.
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.
