Trading An Intraday Triangle

11/08/04 08:34:10 AM

by David Penn

When volatility has been running high, an early morning contraction can lead to explosive results.

Security: ESZ4
Position: N/A

Triangles have become my favorite chart pattern over the last few days and weeks. This is not the case for everyone, I recognize. Head and shoulders patterns may be the king of technical patterns. And experienced traders will take flags, wedges, and pennants in a strong trend whenever they can get them. But of late, triangles have seduced me with their simplicity. And a symmetrical triangle that developed early in Thursday morning's December emini S&P session was yet another case in point.

By volatility, I don't mean the $VIX, which has sunk dramatically in the wake of President Bush's reelection victory. I simply refer to the powerful bounce the markets have experienced since late October. As I've written recently ("Divergences And The Bush Bounce"), this move higher was anticipated by a whole gaggle of technical factors, from candlestick patterns to oscillator divergences. And as such, its staying power is difficult to fade, as market bears have learned to their despair.

Figure 1: An early session breakout from this symmetrical triangle nevertheless boosted the December emini S&P 500 to its price objective north of 1150.

Graphic provided by: eSignal.

It's gotten to the point where as soon as I see the kind of intrabar shadows to the upside followed a few bars later by intrabar shadows to the downside pattern developing, I start thinking triangle. And while I'm very willing to let a triangle setup go if the pattern of lower highs and higher lows is broken, I am no less willing to accept a breakout that arrives a little sooner than it should (or later, in some instances).

The triangle breakout in this 10-minute chart has a number of virtues. The most obvious one is the increase in volume on the breakout bar (I'm using bar and candlestick more or less interchangeably here) shortly after 8 am. The support provided by the 10- and 50-bar exponential moving averages is also helpful for the upside breakout. Note that once prices broke free from the triangle, the 10-bar EMA provided an effective support level for the entirety of the ride up.

I've written a bit about the entry trigger I use, which involves shifts in the moving average convergence/divergence histogram (MACDH). Not all software packages provide a true histogram; most do, but every now and then I'll run into a quality package that nonetheless creates a histogram out of the longer of the two moving averages instead of a true histogram that reflects the waxing and waning difference between the two moving averages of the MACD.

In any event, the shift upward in the MACDH that took place between 7:40 and 8:00 am alerted me to a long entry opportunity at 1146.50. That entry was triggered with the 8:20-8:30 am bar. If you've read our "At the Close" column in Technical Analysis of STOCKS & COMMODITIES magazine (written by our editor, Jayanthi Gopalakrishnan), then you'll know that two-point targets are pretty popular around here as far as intraday emini S&P trades are concerned, and two points were all that was desired out of this Thursday morning symmetrical triangle breakout. Given the size of the triangle - -a tick over four points -- and a breakout at 1146, it seemed as if the move to 1150 would provide plenty of cover for taking the money at + 2 points (that is, 1148.50) and going.

David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine, Working-Money.com, and Traders.com Advantage.

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Trading An Intraday Triangle

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