Mexican silver miner, Endeavour Silver (NYSE: EXK, TSX: EDR), has traced out a multi-week symmetrical triangle pattern, something which is potentially very bullish and could lead to a 50% rise in the stock.
A symmetrical triangle pattern is typically formed after a big move up or down, when neither the bulls nor the bears gain control. The result is a market that drifts sideways forming a series of lower highs and higher lows which form a contracting wedge pattern often referred to as a coiled spring.
It has been estimated that around 75% of symmetrical triangle patterns result in a continuation of the prior trend (in this case an uptrend). However the direction is not known for certain until a decisive breakout is seen.
Chart courtesy of Stockcharts.com
As this chart shows, the contracting trading range has been accompanied by contracting volume, something that often signals the tightening consolidation before the breakout, or the quiet before the storm.
How to play a possible breakout
Therefore those looking to trade a possible breakout should place a tight stop loss and should also look for a spike in volume to confirm the move. Once the breakout occurs it’s common for the price to come back down and retest the downtrend line, which should have switched from being resistance to being support, and some traders like to wait for this pullback before entering their trade.
The price target for the breakout is calculated by measuring the distance between the widest two points of the pattern (green arrow), and adding (or subtracting) it from the breakout price. A breakout from the $11.125 level (as shown on the chart) would give a price target of $16.675, a rise of 49.89%.
Employing a trailing stop loss strategy (which raises the automated stop loss as the price moves higher) would be prudent here, as would tightening the stop as the price approaches its final target.