Tale of the triangle

ZRAN

Several of the stocks I have traded formed a triangle in their chart; for example, IMCO, MOBE, CNQR. In the case of these three stocks, the triangles were all ascending triangles (see illustration), and the stocks eventually broke out and continued an upward trend.

triangle formations Triangle formations

This summer I acquired some shares of Zoran Corp. (ZRAN) as a result of a merger in which ZRAN bought out a stock I was holding in a shares plus cash deal. The ZRAN chart formed a very nice symmetrical triangle that met all the technical criteria: at least two lower highs and two higher lows.

Since this was the first symmetrical triangle of which I was really aware, I was quite fascinated to see it form. The conventional wisdom is that symmetrical triangles, like ascending triangles, are a continuation pattern, a relatively short-term pause in a trend. Supposedly, only 25% of symmetrical triangles mark reversals (StockCharts.com). Wouldn't you know, ZRAN turned out to be among the 25%.

ZRAN stock chart

Another piece of conventional wisdom about triangles that says the optimum breakout point is between half-way and three-quarters of the way to the point of the triangle. ZRAN made it all the way to the tip of the triangle before breaking down. ZRAN was perhaps nudged in the downward direction by an announcement from one of its major competitors that it (the competitor) was gaining market share.

Since the merger was a one-share-to-many transaction I have far fewer shares than my normal lot. As a result, I was not terribly chagrined to see it take a tumble. Since I already got a cash payment of $1.78 per share of the acquired stock, I only have to break even on the remaining ZRAN shares to still come out nicely on the deal.

But, I'm not terribly overjoyed to learn one more piece of conventional wisdom about triangles: after the breakout, or breakdown, the point of the triangle can become a new point of support or resistance. Since ZRAN went down, that suggests that it may have a hard time getting back above the point of the triangle. And that rising ADX line indicates the current trend (more selling than buying) is strengthening. Yikes!

The good news, I guess, is that I haven't encountered a descending triangle, for that is generally considered a bearish formation. Bulls good, bears bad (if you're "long").