Triangles
In social matters, the triangle may lead to a breakup. In the stock market it could mean a reversal of fortune or a consolidation.
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Triangle patterns -- both real and imagined -- occur frequently in market bar charts. A garden-variety form is the Symmetrical Triangle, which has two sloping sides that come together at some point to the right, which represents the future. It consists of a down-sloping resistance line and an up-sloping support line. (See Gann.)
The triangle is formed by an impulse of volume that defines the first point for one of the two lines, either down-sloping or up-sloping line, depending on whether the impulse is up or down, respectively. Viewed as a coil, the initial surge of volume decreases as the pattern unfolds and prices tighten, reflecting uncertainty or push-pull competition in the collective mind of the traders. The uppermost points define the resistance line, which becomes a barrier for prices, and the up-sloping line, which becomes the price support line.
If the triangle resolves itself with prices breaking out in the same direction as when starting the triangle, it is a continuation pattern. But it could be a reversal pattern, which is the fate of about one in four triangles, according to Edwards and McGee -- in their book, Technical Analysis of Stock Market Trends.
Edwards and McGee point out that a proper triangle is completed at about two thirds of its distance to the apex. That's when it has the greatest oomph. Triangles in which the price action carries out to the apex are suspect. You might say these triangles are like a spent coil.
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Right angle triangles are limiting patterns for symmetrical triangles, namely those in which the slope of one of the sides is essentially zero. They are ascending triangles in which the slope is upward, or as descending, in which case the slope is downward.
Like symmetrical triangles, right angle triangles can be continuation or reversal patterns. They act much like the symmetrical triangles, meaning they are likely to ascend out of an ascending pattern and descend out of a descending pattern.
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A pennant is just a small triangle. Most commonly occurring as a continuation pattern, it is typically compact and small. Edwards and McGee note that it slopes down when it appears in an up trend, and it slopes up when in a downtrend. Reliable as an indicator, it often occurs after a sharp advance (or decline) and signals a continuation of the sharp move.
The volume during consolidation dries up very quickly. Characteristic of fast moves, pennants usually show up at the end of an upward cycle and their arrival sounds the alarm for the end of the bull trend.
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Another variety of triangle, the wedge is a larger version of a sloping pennant. Like other triangles, the wedge is initiated with a heavy burst of trading energy and carried out with decreasing volume up to the breakout point. In the topping pattern this is usually the result of frantic buying that takes the stock near to its ultimate high, and in the bottoming pattern it is usually panic selling that takes the stock near to the ultimate low. In the former case the stock goes from strong hands (the specialist's) to weak hands (your's and mine), and in the latter instance stocks go from the weak to the strong.
As the first leg of a basing reverse head and shoulders pattern, the rise in prices during formation of the wedge works against the sharp down trend of its mast and is then simply a buyer trap in a bear market. Prices are likely to fall, again, out of the wedge, to form what might turn out to be the head of the inverted head and shoulders.
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Typically, a triangle formation exhibits a distinctive volume pattern to go with the prices. The volume tends to decline as the pattern develops and then increases sharply as prices break out of the pattern, particularly for a breakout to the upside. Breakouts to the downside don't require the heavy breakout volume, because prices tend to fall of their own weight. It takes trader participation to move prices higher, but prices can drop simply from lack of interest.
The triangle usually begins with heavy trading volume to define the first point of the triangle. On upward oriented consolidations, as in the above diagram, this is point A. The price then pulls back on lighter volume to define the second point, B. Then it surges upward again to a price lower than the high and with less volume, establishing the upper line. Finally it falls back again, but not as far down as before. On the third upward try, on increased volume, enthusiasm is re-ignited and prices push through the down-sloping line, completing the triangle pattern. (Unless of course we have a false breakout, in which case the triangle is redrawn or discarded as no longer significant -- there's always a clinker in the mix!)
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