A Long-Term Symmetrical Triangle

04/09/12 12:38:00 PM

by Chaitali Mohile

The Energy Select Sector SPDR has formed a symmetrical triangle on the monthly time frame chart.

Security: XLE
Position: N/A

A symmetrical triangle can appear in any trend. A breakout direction of this triangle is also uncertain. These are the two major features of the symmetrical triangle that differentiate it from the peer group; this triangle is formed by the two converging trendlines.

In Figure 1, the Energy Select Sector SPDR (XLE) has been forming the symmetrical triangle for the past four years. The converging trendlines has narrowed the trading range of XLE, trapping many short-term as well as long-term traders. According to Figure 1, XLE has formed the triangle after a long bullish rally. Therefore, the pattern looks like a long-term bullish flag & pennant -- a bullish continuous formation.

If we considered the pattern as a flag formation, XLE is likely to break upward. However, the average directional index (ADX) (14) in Figure 1 is very weak and does not indicate any buying pressure. Therefore, we cannot assume the pattern as bullish. In addition, the older pattern loses its strength gradually. Hence, we will consider the pattern as a symmetrical triangle.

FIGURE 1: XLE, MONTHLY

Graphic provided by: StockCharts.com.

The narrowing range is likely to induce high volatility, resulting in high trading risk for traders. We can see that the volume has lowered significantly. The moving average convergence/divergence (MACD) (12,26,9) is negative as the trigger line and the MACD line have tangled, indicating huge volatility. The relative strength index (RSI) (14) is also constructing the symmetrical triangle, and thus, the strength in the rally would remain unstable.

Currently, XLE is plunging towards the lower trendline support, so a good short-selling opportunity is opened for short-term traders. But for the trading strategy we will follow an intraday chart.

FIGURE 2: XLE, DAILY

Graphic provided by: StockCharts.com.

In Figure 2, XLE is retracing toward the 200-day moving average support. Earlier, this long-term moving average was the robust resistance for the index. Therefore, its support will be equally strong and reliable.

In such a scenario, XLE is likely to get trapped in between the 50-day and the 200-day MA. The RSI (14) in Figure 2 is forming a falling wedge. Although the ADX line is showing a weak trend, the selling pressure is high compared to the buying pressure. The MACD (12,26,9) has declined in negative territory. Thus, the daily chart has a more bearish force.

Though XLE can establish support in the next few sessions, the price rally would face 50-day MA resistance. Therefore, short-term trades are likely to get whipsawed in this tricky support-resistance zone.

The symmetrical triangle seen in Figure 1 would narrow further, and thus, narrowing the trading range. So it is advisable to trade with low volume between the support-resistance of 50-day and 200-day MAs (Figure 2). However, the breakout of symmetrical triangle would decide the future direction for XLE. Till then, traders should stay away from XLE.

Chaitali Mohile

Active trader in the Indian stock markets since 2003 and a full-time writer. Trading is largely based upon technical analysis.

Company:	Independent
Address:	C1/3 Parth Indraprasth Towers. Vastrapur
	Ahmedabad, Guj 380015
E-mail address:	chaitalimohile@yahoo.co.in
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A Long-Term Symmetrical Triangle

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