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ASCENDING TRIANGLES


The S&P 500's Ascending Triangle

10/21/02 12:53:11 PM
by David Penn

Is this the way the rally ends? Not with a bang, but a triangle?

Security:   SPX
Position:   N/A

In recent days, the only thing more entertaining than watching the bulls trample over each other in calling (a) THE bottom, (b) the DOUBLE bottom, or (c) a GOP sweep of Congress, has been watching the previously triumphant bears high-tailing it for the deep forest. Why all this commotion in the animal kingdom? Because bear market rallies are among the most exciting phenomena in the stock market. Sure, soaring stock prices and market bubbles make just about everybody feel like Warren Buffet--or, better, Jesse Livermore. But there is nothing more fascinating than watching the combination of sudden dread on the part of the doomsayers and the courageous flicker of hope on the part of those in the rose-colored glasses when markets that had been falling like clockwork suddenly reverse and begin climbing.

If it is true that the best time to buy is when market bears are strutting around like peacocks, then is the best time to sell when the bears are in a state of utter panic, and the bulls are frolicking in the fields? While there is no fading the minor upswing in such market averages as the S&P 500 (a rally of more than 125 points since the October 10th low), I can't help but wonder whether or not the ascending triangle that has developed at the top of the current eight-day rally marks the impending end of the swing--as opposed to being just another consolidation in a continuing move up.

Figure 1: This short-term ascending triangle anticipates at least one more leg up in the S&P 500's eight-day rally.
Graphic provided by: TradeStation.
 

Figure 2: A close-up look at the S&P 500's ascending triangle on a 60-minute chart.

Generally speaking, ascending triangles are continuation patterns in bull markets, tending to signal a move toward higher ground. These patterns consist of a horizontal resistance trendline, and a pattern of higher lows bound by an upwardly sloping support trendline. Breaks to the upside, when they occur, generally happen before the pattern expands beyond the bounds of the converging trendlines. This makes the Monday, October 21st break to the upside in the S&P 500's October ascending triangle all the more compelling to follow.

Although some allowance for a pullback should be made, any pullback toward the breakout area should find some support at the old horizontal resistance line of the triangle--if the breakout is to be successful. Failing that, the upwardly sloping support line of the triangle should be considered as a "last line" of defense against a bearish reversal. What sort of upside does the pattern suggest over the short-term for the S&P 500? Given the size of the ascending triangle (approximately 30 points) and a breakout at 885, it appears as if a short-term minimum move to 915 is likely. This is a significant number in that it would represent a test of the September high of 925--an important test of resistance now that the S&P 500's October rally has bested the previous monthly high upon its breakout from the ascending triangle.



David Penn

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

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