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AK Steel (AKS) recently sold-off sharply after breaking down from a daily triangle pattern �" a great example of the concept.

Let’s take a look at the daily chart then see the damage done and potential support level to watch on the weekly frame.

First, the daily triangle breakdown in AKS:

I’m a big fan of triangles, as they often provide clear trendlines which then result in a break of the trendlines, either up or down, which triggers your trade entry.  The stop is placed on the opposite of the trendline.

In this case, price broke the rising trendline in early April at the $22.00 per share level, triggering an entry with a stop above $24.00.

The logical downside target as a minimum move down to test the February low just above $19.00, but a maximum target to test the November 2009 low at the $15.00 level.

This breakdown is also a great example of the “Range Alternation Principle,” which states that price alternates between periods of range compression (like the triangle) and expansion (like the breakout).

Now that we’re in an expansion move down, the $15.00 level will be an important support level to watch.

Next, the ‘aftermath’ and level to watch on the weekly frame:

In addition to breaking under the daily triangle at $22, price also broke a rising trendline about the same time at the $20.00 level �" adding another trade set-up beyond the daily triangle break.

Notice also that price broke under the 20 and 50 week EMAs at the $20.00 level �" in summary, it was very important once price broke all these levels of support and it is leading now to the ’sell-off’ once critical support broke.

On a separate note, notice the swing high to $26.50 in early January that took us to the convergence of the 200 week SMA (red) and the rising trendline (blue) as drawn.

You can take profits and consider shorting (if so desired) once price tests confluence resistance �" the two week sell-off took price back to $20.00, which was the convergence of the 20 and 50 EMAs.

Interesting lessons from a popular stock.

Corey Rosenbloom, CMT
Afraid to Trade.com