Rectangle patterns are simple. Throughout the Today’s Big Stock newsletters, probably the most common pattern discussed is the Rectangle. Traders like these patterns because trading them is very simple, clear and straightforward. The latest Rectangle pattern in the long list I have highlighted would be that of Superior Energy Services, Inc.
Superior Energy Services, Inc. is a provider of specialized oilfield services and equipment. The Company provides services, tools and lift boats to maintain, enhance and extend producing wells, as well as plug and abandonment services at the end of their life cycle. It focuses on serving the drilling-related needs of oil and gas companies through its drilling products and services segment, and the production-related needs of oil and gas companies through its subsea and well enhancement, drilling products and services and marine segments. It also owns oil and gas properties in the Gulf of Mexico. The company operates in four business segments: subsea and well enhancement, drilling products and services, marine services, and equity-method investments.
To review Superior Energy’s stock, please take a look at the 1-year chart of SPN (Superior Energy Services, Inc.) below with my added notations:
SPN has been trading within a sideways Rectangle for the last (4) months. Rectangle patterns form when a stock gets stuck bouncing between a horizontal support and resistance. A minimum of (2) successful tests of the support and (2) successful tests of the resistance will give you the pattern. What’s great about a Rectangle pattern is that it not only provides you with trading points of support & resistance, but it also gives clearly defined breakout & breakdown points. For SPN, the Rectangle pattern formed a $32 resistance (navy) and a $26 support (red).
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 point to get the minimum price objective. For example, since the Rectangle pattern for SPN is $6 high ($32 – $26), SPN should climb to a minimum of $38 ($32 + $6) if it breaks above $32 or fall to $20 ($26 – $6) if the stock breaks below the $26 level. Chart pattern price targets are certainly not guarantees, but they are often fulfilled.
The Tale of the Tape: SPN 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. The possible long positions on SPN would be either on a pullback to $26, or on a breakout above $32. The short opportunities would be at either $32 or on a breakdown below $26. With this type of pattern though, a lot of traders will commonly wait for the break of either the $32 or $26 level before making any 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