As I’ve stated before, everyone always loves a good Rectangle pattern. Throughout the Today’s Big Stock newsletters, probably the most common pattern discussed 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 Cliffs Natural Resources, Inc.
Cliffs Natural Resources Inc. is an international mining and natural resources company. The company is a producer of iron ore pellets in North America and metallurgical coal, and a supplier of direct-shipping lump and fines iron ore out of Australia. Its operations are managed into groups: North American Iron Ore; North American Coal; Asia Pacific Iron Ore; Asia Pacific Coal; Latin American Iron Ore; Alternative Energies; Ferroalloys; and Global Exploration Group. In North America, it operates six iron ore mines in Michigan, Minnesota and Eastern Canada, five metallurgical coalmines located in West Virginia and Alabama and one thermal coal mine located in West Virginia.
To review Cliffs Natural’s stock, please take a look at the 1-year chart of CLF (Cliffs Natural Resources, Inc.) below with my added notations:
CLF has been trading within a broad, 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 CLF, the Rectangle pattern formed a $74 resistance (purple) and a $60 support (red).
One other thing to notice: CLF also seems to have a common internal level at $65 (green). If the market pulls back in preparation for a move higher, CLF might find support at that $65 level en route to breaking out above $74.
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 CLF is $14 high ($74 – $60), CLF should climb to a minimum of $78 ($74 + $14) if it breaks above $74 or fall to $46 ($60 – $14) if the stock breaks below the $60 level. Chart pattern price targets are certainly not guarantees, but they are often fulfilled.
The Tale of the Tape: CLF 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 CLF would be either on a pullback to $60, or on a breakout above $74. (In addition, a long play could be made on a pullback to $65 if one is bullish on the overall market.) The short opportunities would be at either $74 or on a breakdown below $60. With this type of pattern though, a lot of traders will wait for the break of either the $60 or $74 level before making any trade.
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