In one of my recent newsletters I reviewed the Rectangle pattern that had formed on HAL (Halliburton Company). HAL had formed a nice sideways consolidation from $45 to $51 and recently broke through its $51 resistance. After posting that newsletter, I received several inquiries on whether or not I had any stocks on my list similar to HAL. Well, actually, I do!
Berry Petroleum is an energy company engaged in the production, development, exploitation and acquisition of crude oil and natural gas. Please take a look at the 1-year chart of BRY (Berry Petroleum) below with my added notations:
Look familiar? BRY had created a similar Rectangle pattern as HAL, only with a higher resistance. To refresh, a Rectangle pattern is simply formed when a stock gets stuck bouncing between a support and resistance. A minimum of (2) successful tests of the support and (2) successful tests of the resistance will give you the pattern. The great thing with a Rectangle pattern is that it will provide you with clearly defined breakout and breakdown points. In the BRY’s case, the Rectangle pattern formed a $52.50 resistance (red) and a $45 support (green). I also noticed that BRY sometimes finds $50 as important, which could prove useful if BRY doesn’t hold $52.50 on it’s recent pullback.
Chart patterns can also 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 BRY is $7.50 high ($52.50 – $45), BRY should climb to a minimum of $60 ($52.50 breakout point + $7.50 pattern height) now that it has broken higher. Chart pattern price targets are certainly not guarantees, but they are often fulfilled.
The Tale of the Tape: BRY 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. BRY has recently broken above its $52.50 resistance, should be moving higher, but has now seemed to have pulled back to that $52.50 level to test as support. A trader could enter a long position here in expectation of a run to $60. However, if BRY were to break below $52.50, a long trade could also be entered on the “mini” level of $50 that I have highlighted (blue). Stops should be set under the level of entry, either $52.50 or $50.
Side note: If BRY were to move considerably lower, $45 would come back into play for a trade.
Before making any trading decision, decide which side of the trade you believe gives you the highest probability of success. Do you prefer the short side of the market, long side, or do you want to be in the market at all? If you haven’t thought about it, review the overall indices themselves. For example, take a look at the S&P 500. Is it trending higher or lower? Has it recently broken through a key resistance or support level? Making these decisions ahead of time will help you decide which side of the trade you believe gives you the best opportunities.
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