|Symmetrical triangles are possibly the most indecisive pattern out of all technical patterns. Most break out in the direction of the original trend, but some reverse long-term trends and this possibility should always be kept in mind. A symmetrical triangle is a sideways price area or trading range whose top can be defined by a downward sloping line and whose bottom can be connected by an upward sloping line. While the sideways action is occuring, it is characterized by diminishing volume. The price action in a symmetrical triangle is often described as a coil or spring which winds tighter and tighter, finally snapping free. The prices on breakout or breakdown from these symmetrical triangles give sizable tradable moves. |
The point where the upward and downward sloping lines meet is called the apex of the triangle. This is often a point of support or resistance once the breakout/breakdown occurs.
|I always like to see big volume on a breakout. Low volume breakouts often lead to price action which ends up making a larger triangle in the same spot. Triangle breakouts/breakdowns often correct back towards the apex of the triangle, which acts as support or resistance and provides a low risk entry. If a triangle breakout fails to hold the apex of the triangle, it often means pattern failure and can lead to large move in the opposite direction. Trading them before a confirmed breakout could be hazardous. Look for as much confirmation as possible before entering a trade. Additional confirmation often comes from charting the stock on a larger time frame.|
|Figure 1: Daily chart of China Unicom.|
|Graphic provided by: Stockcharts.com.|
|In this article I will analyze China Unicom's symmetrical triangle breakout that occurred on January 2, 2004. The symmetrical triangle broke out at $9.50 on heavy volume. The breakout was preceded by low volume sideways action. This triangle seems to be a consolidation formation as it has broken out in the original direction. Hence its target will be a move similar in size to the one preceding the triangle. If this were a reversal pattern, its target would be the width of the triangle. The price has held a long-term upward sloping trendline, which should act as support and a stop for long trades. A trendline breakout on the RSI has also given a buy signal.|
Figure 2: Weekly chart of China Unicom.
I do not consider the above as a confirmation. I would like to see the price sustain $10 for a couple of sessions as indicated on the weekly chart. After a breakout from a symmetrical triangle the price often retraces to the apex point. I would buy once the apex area is tested. If there is one pattern to be cautious about, this is it. Once the initial tentativeness is over, it generally gives a large move. Now, look at the weekly chart to get additional confirmation. As you can see, the $10 level has acted as major resistance in the past. A heavy volume breakout is desirable in this case. Also the ADX shows the stock is in a strong trend and this increases the probability of sustaining the breakout. A medium-term target of $15 is a good possibility given that the stock has consolidated between $5 and $10 for a long time.
|Title:||Chief mkt strategist|
|Phone # for sales:||9871066337|
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