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5 Relative Strength Trades Flashing Buy

Stocks in this article: HBC KUB E TRW CYT

Eni SpA

We're seeing the exact same setup in shares of Eni SpA (E) right now. The Italian oil and gas firm is, like Kubota, forming a rectangle pattern. The big difference here now is the fact that Eni's rectangle hasn't seen the breakout yet.

Typically, rectangles are continuation patterns. That means that more often than not, rectangles tend to resolve in the same direction as the trend that preceded them -- in this case, Eni started off in an uptrend, so traders should be looking for a breakout above $48 resistance. But the strong uptrend in this stock's relative strength line adds some extra confidence to an upside breakout in E.

When you're looking at price patterns, it's important to think of them in terms of buyers and sellers, after all patterns like the rectangle don't work because of magic or geometry. Instead, it all comes down to supply and demand in the market. The resistance level at $48 is a price where sellers have recently been more eager to sell and take gains than buyers were to buy. The breakout above $48 indicates that all of the excess selling pressure at resistance has been absorbed by increasingly committed buyers.

That's why it's critical to wait for $48 to get taken out before becoming a buyer.

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