When it comes to reading charts, not too many things are simpler than a Rectangle pattern. Throughout the Chart School newsletters, probably the most common pattern discussed is the Rectangle. I 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 Alkermes plc.
Alkermes plc. is an integrated biotechnology company. Alkermes is engaged in the business of developing, manufacturing and commercializing medicines for the treatment of prevalent, chronic diseases. The company develops, manufactures and commercializes VIVITROL for alcohol dependence and manufacture RISPERDAL CONSTA for schizophrenia and bipolar I disorder. Its pipeline includes extended-release injectable and oral products for the treatment of prevalent, chronic diseases, such as central nervous system, disorders, reward disorders, addiction, diabetes and autoimmune disorders. Alkermes has a research facility in Massachusetts, a commercial manufacturing facility in Ohio and the company has its corporate operations in Ireland.
To review Alkermes’ stock, please take a look at the 1-year chart of ALKS (Alkermes plc.) below with my added notations:
ALKS has been trading within its sideways Rectangle for the last (5) 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 ALKS, the Rectangle pattern formed an $18 resistance (red) and a $14 support (blue).
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 ALKS is $4 high ($18 – $14), ALKS should climb to a minimum of $22 ($18 + $4) if it breaks above $18 or fall to $10 ($14 – $4) if the stock breaks below the $14 level. Chart pattern price targets are certainly not guarantees, but they are often fulfilled.
The Tale of the Tape: ALKS 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 ALKS would be either on a pullback to $14, or on a breakout above $18. The short opportunities would be at either $18 or on a breakdown below $14.
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