Continuing patterns 2. Triangles

by J Victor on December 9th, 2010

Whenever there is a convergence of two trend lines flat, ascending or descending with the price of the security moving between the two trendlines, it takes shape of a triangle. A triangle formation can be any of the following types. Symmetrical Triangle. Ascending Triangle and Descending Triangle. All the three are continuing patterns, meaning that it signals a period of consolidation in a trend followed by a resumption of the prior trend.

Symmetrical triangle formation: it is formed by the convergence of a descending resistance line and an ascending support line. The two trendlines in the formation of this triangle should have a similar slope converging at a point known as the apex. The price of the security will bounce between these trendlines, towards the apex, and typically breakout in the direction of the prior trend. that is. if preceded by a downward trend, the focus should be on a break below the ascending support line. If preceded by an upward trend, look for a break above the descending resistance line. As the symmetrical triangle extends and the trading range contracts, volume should start to diminish. This refers to the tightening consolidation before the breakout. The symmetrical triangle can extend for a few weeks or many months. If the pattern is less than 3 weeks, it is usually considered a pennant. Typically, the time duration is about 3 months. Symmetrical triangle is a ‘neutral’ formation. The future direction of the breakout can only be determined after the break has occurred.  Attempting to guess the direction of the breakout can be dangerous. Even though a continuation pattern is supposed to breakout in the direction of the long-term trend, this is not always the case .A break in the opposite direction of the prior trend should signal the formation of a new trend.

Example :

Ascending Triangle. The ascending triangle is a bullish pattern, which gives an indication that the price of the security is headed higher upon completion. The pattern is formed by two trendlines: a flat trendline being a point of resistance and an ascending trendline acting as a price support. The ascending triangle indicates that the sellers are now less interested in the stock and the buyers volume is increasing. Once the demand increases, the price naturally will tend to go up and break the resistance levels and resume the upward trend.

Descending Triangle. Descending triangle is just the opposite of ascending triangle. If an ascending triangle was a bullish pattern, a descending triangle is a bearish pattern .In a descending triangle formation, the two trendlines drawn will show a flat support line and a downward-sloping resistance line. Indicating that the prices will fall further. As the pattern develops,  volume usually contracts. When the downside break occurs, there would ideally be an expansion of volume for confirmation. Volume confirmation is important.

You may like these posts: