Every so often, I’ll run across a new trading opportunity that doesn’t quite fit into a single “identity”. Share prices could be narrowing, working their way towards a breakout while also forming a traditional short or long setup.
Typically, I’d avoid trades that are “tightening” like that. Simply because the potential gain often decreases when the highs and lows draw closer together over time.
But that doesn’t mean I ignore every trade setup that does this. Rather, I do a little more digging to see if we can make a traditional setup play right into a breakout, hopefully leading to explosive profits once the breakout is confirmed.
Luckily for us, a great example of what I’m talking about just popped up after the market closed yesterday, in what ended up being a bit of a see-saw trading session following Fed Chairman Jerome Powell’s testimony.
In the daily (not weekly this time) candlestick chart above, you can see that shares of GPK, a commercial packaging manufacturer, are forming an ascending triangle – something I’d normally try to make a “breakout play” on by setting trade triggers above and below the upper and lower trendlines.
Whichever order fills first, I cancel the other, and end up holding the position (either long or short) until a retracement seems likely.
But in this case, a very strong short setup is present. We’ve got recent contact with the upper Bollinger Band (BB) and the presence of a double top. Better yet, yesterday’s candlestick closed below the last 5 bars. Should it drop a little further (0.50%), entering a short position would make sense.
In addition to that, though, we also have the triangle to think about. If GPK holds that bottom trendline, then our short position would rebound off the slope of the triangle at around $13.75 over the next few days.
It if does, selling off at contact with the trendline could be a wise move. But if GPK descends below the bottom half of the triangle, “breaking out” so to say, we could have a potentially huge trade on our hands.
The whole scenario is about to play out over the next couple of days, so keep an eye on GPK to see what happens as it approaches the end of the ascending triangle. Either way, going short here could entitle opportunistic traders to some rapid-fire gains, regardless of a major breakout.
