Honestly, I really enjoy analyzing stock charts. The price movement of a stock can tell you so many things. Between important price levels, chart patterns, breakouts and breakdowns, there are just so many good trades to be made. However, you do have to wait and make the right trade. The right trade can be easily identified if you have the right . . . . chart!
So, please take a look at the 1-year chart of HAL (Halliburton Company) below with my added notations:
HAL has created a common chart pattern known as a Rectangle. A Rectangle pattern is simply formed when a stock gets stuck bouncing between a support and resistance. A minimum of two successful tests of the support and two successful tests of the resistance will give you the pattern. The great aspect of a Rectangle pattern is that it will provide you with clearly defined breakout and breakdown points. In the case of HAL, the Rectangle pattern has formed a $51 resistance (red) and a $45 support (green). If HAL were to break above $51, higher prices should result. On the flip side, if HAL were to break below $45, lower prices should follow.
Another useful tip with chart patterns is their ability to provide price targets. Simply take the height of the overall pattern and add or subtract that amount to or from the breakout or breakdown points to get the minimum price objective. For example, since the Rectangle pattern for HAL is $6 high, if HAL were to break above $51 a trader would expect HAL to climb to a minimum of $57. Chart pattern price targets are certainly not guarantees, but they are often fulfilled.
The Tale of the Tape: HAL has formed a very common chart pattern know as a Rectangle. This pattern shows clear breakout and breakdown points for a potential long or short position. If HAL were to break above its $51 resistance, a trader could enter a long position in expectation of a run to $57. On the other side, if HAL were to turn lower and break below $45, a trade would want to enter a short position with an expected drop to $39.
Other potential trades: A long position on a pullback to the $45 support, or a short trade at its current resistance of $51. However, a stock near its 52-week high such as HAL might not be the highest probability short trade.
No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade. Capital preservation is always key!
Christian Tharp, CMT