The rare earth producer Molycorp, has just broken out of a falling wedge pattern, which likely signals a trend reversal and a significant advance for the stock.
As the chart below shows, Molycorp has been in a downtrend since the beginning of May 2011, and a falling wedge pattern found within a downtrend, typically represents a reversal pattern. The falling wedge pattern is a contracting trading range with a downward tilt, illustrated by the two blue trend lines.
A 12 Month Chart of Molycorp
Chart courtesy of Stockcharts.com
Note: The long red arrow on the chart is intended to suggest the future direction of the price, not that this move will occur in a single advance.
Determining the size of the breakout
The size of the expected breakout from the pattern can be determined by measuring the widest portion of the wedge and adding it to the breakout level. The increase in volume (circled) accompanying the breakout is a bullish sign which helps validate the breakout.
We should now see Molycorp steadily advance towards the $55-$57 area shown on the chart. Stops should be set just below the downtrend line which should now provide support.