Probably one of the more common pattern discussed in the Today’s Big Stock newsletters 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 The Ryland Group, Inc.
The Ryland Group, Inc. is a homebuilders and a mortgage-finance company. In addition, Ryland Mortgage Company and its subsidiaries, and RMC Mortgage Corporation provide mortgage financing and related services. The company consists of six operating business segments. All of Ryland’s business is conducted and located in the United States. The company’s operations span aspects of the home buying process from design, construction and sale to mortgage origination, title insurance, escrow and insurance services. During the year ended December 31, 2011, the homebuilding operations were consisted of approximately 97% of consolidated revenues. The homebuilding segments generate their revenues from sales of completed homes, with sales of land and lots. In addition to building single-family detached homes, the homebuilding segment also builds attached homes, such as townhomes, condominiums and some mid-rise buildings, which share common walls and roofs.
To review Ryland’s stock, please take a look at the 1-year chart of RYL (The Ryland Group, Inc.) below with my added notations:
RYL has been trading within a sideways Rectangle for the last (3) 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 RYL, the Rectangle pattern formed a $21 resistance (blue) and a $17 support (green).
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 RYL is $4 high ($21 – $17), RYL should climb to a minimum of $25 ($21 + $4) now that the stock has broken through resistance.
The Tale of the Tape: RYL formed a very common chart pattern know as a Rectangle. Last week the stock broke through resistance and should be headed higher overall. A long trade could be made on any pullbacks to the $21 area.
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