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A Triangle In The Making

07/29/11 09:09:59 AM
by Koos van der Merwe

Symmetrical triangles can be a shakeout or an end run.

Security:   VIA
Position:   Buy

Symmetrical triangles, also known as a "coil," is very common and is formed by an uncertain market. Each price fluctuates smaller than its predecessor, resulting in a pattern bounded by a downtrend and an uptrend as shown in Figure 1.

By definition, a symmetrical triangle must have at least four reversal points, when a breakout may occur at any time in the triangle before the apex is reached. They are not as reliable as head & shoulder formations, and in reality are subject to false breakouts called "shakeouts" or "end runs."

FIGURE 1: VIACOM, DAILY. Here's the Viacom daily chart showing a possible outcome of the pattern.
Graphic provided by: AdvancedGET.
Figure 1 shows how the price rose strongly from a low of $34.53 in August 2010 to a high of $60.94 by May 27, 2011. The price then fell to $53.56 by June 14, along with the relative strength index (RSI), which then gave a buy signal. Since that date, the price has vacillated along with the market. We can now expect two formations to occur:

1. Shakeout. Should the price fall below the upslanting line, in the region of $55.52, the price will fall lower before rising to a new high, with a target in the region of $91 (60.94 - 34.53 = 26.41 + 55.52 = 91.93). I have shown the expected move in red.

2. End run. Should the price break out upward in the region of $58.52, the price will rise to test the $60.94 peak and then fall lower.

The only way to identify which formation is in the offing is to look at the volume. A breakout to the upside with the shakeout pattern will be on high volume, whereas a light volume will indicate a false move and the end run pattern.

As the chart shows, volume appears to be light, suggesting the end run pattern.

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.

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