Triangle Formations

05/15/00 09:47:37 AM

by Jason K. Hutson

A downward trend followed by progressively higher lows had produced a triangle formation for SYMC. Then stock prices broke out below the lower support line.

Security: SYMC
Position: N/A

Triangles are a classic type of chart formation that can signal either a reversal or a continuation of a trend. The triangle is formed by the convergence of two trendlines- an upper resistance and lower support line. The ascending triangle is particularly significant because it forms less frequently than the other descending or symmetrical triangle patterns, and is more likely to be signaling an upward movement in the security.

When an ascending triangle formation occurs, it usually signals a continuation pattern in an uptrend, but sometimes can be found at the bottom of a downtrend, signaling a reversal. The ascending triangle has a flat upper trendline while the lower trendline slopes upward. This is indicative of more aggressive buying than selling as the lows get progressively higher, while the highs make it to about the same level each time before breaking out to the upside.

The completion of the formation occurs when prices break through the upper, flat trendline, before finishing the apex of the triangle. Prices could retrace to the horizontal trendline before resuming their upward path but not reenter the triangle. Unlike symmetrical triangles, which are neutral in predicting breakout direction, ascending triangles usually break to the upside. This is also true when preceded by an uptrend, and when this happens, ascending triangles act as a continuation pattern, rather than a bottom.

THE ASCENDING TRIANGLE BOTTOM. This is identified by the formation of a flat upper trendline and ascending lower trendline.

Graphic provided by: Window.

Typically, volume is heavy at the beginning and contracts during the formation of an ascending triangle. It again increases during the breakout above the flat trendline. This corresponds to the number of shares for sale diminishing at the upper trendline price, as buyers bid the stock up and try to catch the breakout. In this situation a tight stop could have been placed right along that upward trendline (bottom of the triangle). This would have minimized the risk for a LONG trade. Now a trader can view the previous support line as a possible resistance level.

In the above graph, a very promising upward triangle began forming for Symantec Corp. (SYMC). But the prices broke through the bottom support line signaling a continuation of the downtrend, rather than the expected upswing in prices. The graph from a previous article,How to Profit From Trading Ranges, Example 2, shows a possible support level following the breakout of SYMC's triangle formation.

Jason K. Hutson

Traders.com Staff Writer. Enjoys trendlines, support and resistance, moving averages, RSI, MACD, ADX, Bollinger bands, parabolic SAR, chart formations, and volume analysis.

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Triangle Formations

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