Brambles and Triangles

Triangles are one of the most common and easily recognisable formations on the charts.  There are three main triangular styles: The ascending, descending and symmetrical.

Triangles form during the battle between supply and demand, producing oscillations with crests and troughs in price confined between two lines.  In the case of the ascending triangle, the lower boundary is upward sloping and gives the indication for the future direction for the price.  The upper boundary or where the crests in price halt is horizontal.  In terms of the supply/demand relationship, this means that the price rises to a level where traders believe that its overpriced and the sellers enter the market and force the price down until it reaches a level where it is deemed that the price is cheap and the buyers come in and the price bounces and rallies.  The price reaches towards its recent crest but as it is approached and reached the sellers return, overtaking the buying demand and forcing the price down.   However, as the price falls the buyers return at a higher level than the recent trough and push the price up but the previous crest level again attracts selling.  These price fluctuations continue until the buying pressure is too strong and overwhelms the sellers with a price break up through the horizontal barrier. 

When this occurs the likely movement away from the pattern is the same measurement as the height of the triangle.

The symmetrical triangle is more complicated as it represents an equal struggle between buyers and sellers with the pattern emerging within two sloping lines, almost equidistant and sloping towards an invisible central line. The future direction for the price for this style of triangle can only be determined by which side of the triangle breaks, in other words, which side of the supply/demand relationship is the stronger, the buyers or sellers.  The measurement or target is the same as the height of the triangle.  One word of caution in identifying these patterns is that the churning within the pattern must not progress into its apex, but must breakaway before the point is reached.

Applying triangles to Brambles

If we follow the price for Brambles over the last year or so we find that three triangles have formed during the period.  The first, a symmetrical triangle developed from August 11, 2005 until October 5, 2005 with the pattern breaking down at $8.75.  Measuring the height for the pattern this suggested a minimum decline to $8.10, achieved on October 20, dropping to a spike reversal on October 21 at $8.02 to bounce and recover. 

The second triangle was of the ascending style and formed between December 1, 2005 and March 20, 2006.  The pattern was completed with the rise through $10.50, signaling a buy with a profit target for the share price to $11.50, a 9.5% increase*.  The target was achieved on May 10 and became the starting point for the third and symmetrical triangle which was completed on August 23, with the price gap up to $11.00, issuing another buy signal for a profit target to $12.50 reached on September 4 after a 13.6% increase*, which was followed by a quick price reversal.

  

Graph of triangles

In order to benefit from this movement we would need to translate this into a tradable instrument on ASX. This may be achieved by the purchase of shares directly.  Alternately we could take a leveraged view using warrants to invest in a trading product over BIL. The trading warrant will track the performance of BIL while providing a leveraged return.

If a leveraged view using trading warrants over BIL was decided upon the following return would be accomplished.

Share Trading Warrants
Capital $10,000.00  $5,000.00
Purchase Price  $10.50  $0.12
Shares / Warrants  952 41667 (ratio 1:1)
Sell Price $11.50  $0.18
Profit per share/warrant  $1.00  $0.06 (ratio 1:1)
Total Profit  $952.00  $2,500.00
% Return  9.52% 50.00%
   
If a trading warrant had been used a 50.00 % return on our initial investment would have be enjoyed compared with a 9.52% return if we had invested directly in BIL shares.

About the author

Regina Meani has over 29 years experience in the stock market, working as a chart and technical analyst for Deutsche Bank and Huntleys’ before freelancing. She has lectured for the Securities Institute of Australia, Sydney University and the ASX and written "Charting, An Australian Investor’s guide".

Regina is a Certified Financial Technician and a member of the ATAA and is vice-president of the Australian Professional Technical Analysts (APTA). She has worked on the Body of Knowledge for the International Association, heading up their committee for Pattern recognition and is currently working on the new international syllabus and the IFTA journal and has represented Australia at the International forums for Technical Analysis – most recently speaking in Spain.

She has a regular column in the Sun Herald Investor and the Melbourne Sunday Age and in the AFR Smart Investor Magazine. Her freelance work includes private tutoring and larger seminars, training investors and traders in Market Psychology, CFD and share trading and Technical Analysis.

Disclaimer:

Information provided by ASX Traders Update is for educational purposes only and is not intended to include or constitute financial product advice. You should obtain independent advice from an Australian financial services licensee before making any investment decisions. The views expressed by the author of this article are not necessarily those of the Australian Stock Exchange.