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 CSX Corporation
CSX Corporation, together with its subsidiaries, provides rail-based transportation services. It offers traditional rail service and the transport of intermodal containers and trailers. The company transports crushed stone, sand and gravel, metal, phosphate, fertilizer, food, consumer, agricultural, automotive, paper, and chemical products; and utility, industrial, and export coal to electricity-generating power plants, steel manufacturers, industrial plants, and deep-water port facilities. It also provides intermodal transportation services through a network of approximately 50 terminals transporting manufactured consumer goods in containers in the eastern United States, as well as performs drayage services and trucking dispatch operations. In addition, the company operates various distribution centers and storage locations. It operates approximately 21,000-route mile rail network, which serves various population centers in 23 states east of the Mississippi River, the District of Columbia, and the Canadian provinces of Ontario and Quebec, as well as operates approximately 4,000 locomotives.
To review CSX’s stock, please take a look at the 1-year chart of CSX (CSX Corporation) below with my added notations:
CLF has been trading within a broad, sideways Rectangle for most of the last year. 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 CSX, the Rectangle pattern formed a $23 resistance (navy) and a $60 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 CSX is $3 high ($23 – $20), CSX should climb to a minimum of $26 ($23 + $3) if it breaks above $23 or fall to $17 ($20 – $3) if the stock breaks below the $20 level. Chart pattern price targets are certainly not guarantees, but they are often fulfilled.
The Tale of the Tape: CSX has formed a very common chart pattern know as a Rectangle. The possible long positions on CSX would be either on a pullback to $20, or on a breakout above $23. The short opportunities would be at either $23 or on a breakdown below $20.
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