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Intraday Dueling Triangles

07/28/05 11:40:40 AM
by David Penn

The five-minute chart reveals how a pair of triangles, the first ascending and the second descending, anticipated a day's worth of market movement.

Security:   QQQQ
Position:   N/A

Think chart patterns are fun? How about two chart patterns in one day? How about two chart patterns that are one-day?

On July 21, the markets sold off early. This was due largely to the four-year highs reached in many markets, such as the S&P 500, the day before, but also because of anxieties stoked by the second (albeit milder in terms of casualties) terrorist bombing in two weeks of buses and subway stations in London.

An ascending triangle bottom in the morning begets a descending triangle top in the afternoon.
Graphic provided by: eSignal.
 
But the bounce was swift in coming, as shown by the five-minute chart of the QQQQ shown above. By the early morning, the QQQQ was fully in bounce mode. And look at the form that the short-term bottom and subsequent bounce made. While ascending triangles are more typically discovered as components of upwardly trending markets, the phenomenon of ascending triangles that are reversals -- in this case both a bottom and a reversal pattern -- is not unheard of.

What is especially interesting about the ascending triangle bottom in the chart shown above is that its minimum upside projection is met perfectly -- and that meeting begets, eventually, another directional triangle. In this case, the second directional triangle is of the descending variety and anticipates a break to the downside. That break, from a triangle that is almost exactly the same size as the previous ascending triangle from the morning, saw the five-minute QQQQ fall back to just below the level of the breakout from the morning's ascending triangle.

While patterns and moves like this can be difficult to capture in real time, they do remind us of the effectiveness of chart patterns. In both instances, the breakout projections were reached as expected, even as their respective breakouts took slightly different paths out and away from the triangle patterns. In the first case, the breakout was almost a straight shot to the upside price objective. In the second case, the breakdown moved about halfway to the downside objective before pulling back to test the breakdown level and then resuming the descent.

So the next time you hear people talking about a market that "ain't going nowhere," be wary of getting caught in their slow-moving timeframe. There might be a whole lot of shaking going on underneath.



David Penn

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

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