Triangles
Tightening Price Action Leads to a Breakout
There are various forms of consolidation and they occur anytime there is an
equilibrium of buyers and sellers. One of the most predictive consolidation
formations is the triangle.
A triangle forms as a
security begins to set up a trading range that continually tightens. When we
look for triangles, it is important to note that there are basically three
kinds: Symmetrical, Ascending and Descending.
Symetrcial Triangles are
formed when we can draw definite trendlines across the lows and the highs of
price activity. Symmetrical Triangles can breakout to either side of the
formation, but usually the breakout occurs in the direction of the previous
trend.
An Ascending Triangle is
formed when we can draw a resistance line across the highs and an upward
trendline across the lows. This formation will usually see the breakout occur
to the upside, or through the resistance level.
A Descending Triangle is
similar to the Ascending Triangle. It occurs when we can draw a support line
across the lows and a downward trendline across the highs. Descending
Triangles usually break to the downside, or through the support level.
When we spot one of these
patterns, we are looking for a breakout on volume. That is to say that when
price moves through on of the levels of these formations, we want to see
large volume on the breakout bar. Also, remember that often the strongest
breakouts occur about 2/3rds into the formation. Many times traders will miss
the breakout move while waiting for the formation to complete. We must keep
in mind that triangles are composed of support, resistance and/or trendlines,
and a break of any of these lines is significant - particularly on volume.
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DNC's Symmetrical
Triangle breaksout on volume about 2/3rds into the formation.
The Ascending
Triangle for DNY breaks through the resistance level as expected.
URI falls through
the support level of the Descending Triangle about 2/3rds into the formation.
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