Internet giant Yahoo! (YHOO) is forming a triangle trade of a different sort this week.
Yahoo! has been consolidating in a symmetrical triangle, or "coil" pattern, for the last couple of months, bouncing its way sideways between a pair of converging trend lines. Consolidation patterns such as the symmetrical triangle are common after big moves -- they give investors a chance to catch their breath and figure out their next moves. So after the 55% rally in shares of Yahoo! over the last year, it's not surprising that this stock is slinking sideways now. The buy signal comes on a breakout to the topside of the pattern, currently right at the $39 level. If shares can take out $39, then we've got a strong indication that buyers have regained control of shares.
One important factor to keep in mind with coil trades like Yahoo!'s is the fact that they tend to come with violent breakouts. That's because YHOO's price volatility is getting constricted by the converging trend lines in shares, reducing until the point where the stock breaks out of the triangle. Since stock volatility is cyclical (it swings from periods of low volatility to high volatility), the relatively low volatility of YHOO here is most likely to be followed up with a big, fast move.