With earnings season now firmly underway, isolating stocks with clear breakdown and breakout points could be helpful in deciphering a stock’s future move once their earnings report is released. A stock I recently identified with clear breakdown and breakout points is TEVA. (Teva Pharmaceutical Industries)
Teva Pharmaceutical is a global pharmaceutical company. It develops, produces and markets generic drugs in all treatment categories. The company has a pharmaceutical business and sells generic pharmaceutical products in a range of dosage forms, including tablets, capsules, ointments, creams, liquids and inhalants.
Please take a look at the 1-year chart of TEVA (Teva Pharmaceutical Industries) below with my added notations:
TEVA has created a simple chart pattern known as a Triangle. Combining a down trending resistance with an up trending support forms the Triangle pattern. As the support and resistance converge on each other the pattern is created. Since there is no true way to know which way the stock will break, most traders will wait for the breakout or breakdown before entering a trade.
As with most chart patterns, Triangles will provide you with clearly defined breakout and breakdown points. In the case of TEVA, the breakout would be through the trend line resistance (approx. $50) and the breakdown would be below the trend line support (approx. $47). This stock and this pattern should be monitored until July 27th when the company releases their earning report.
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 Triangle pattern for TEVA is $6.00 high ($51 – $45), TEVA should climb to a minimum of $57 ($51+$6) on a break higher, while falling to $41 ($47-$6) on a break lower. Chart pattern price targets are certainly not guarantees, but they are often fulfilled.
The Tale of the Tape: TEVA has formed a simple Triangle pattern. A trader could enter a long position on a break above the down trending resistance (near $50) with a stop set under the entry level. However, if TEVA were to break below the trend line support (currently near $47), a short trade could be entered with a stop above the trend line.
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