Trading With Triangles

(by John Lansing)

Using the idea of Elliot Waves, which are comprised of three steps forward and two steps back, we find triangles, which are overlapping five-wave affairs. They appear to reflect a balance of forces, causing a sideways movement that is usually associated with decreasing volume and volatility.

Triangles fall into four main categories: ascending, descending, contracting (or symmetrical) and expanding (or reverse symmetrical) as seen below:

Let's look at each type of triangle a little more closely.

Ascending Triangle

You may also hear this called an ascending right triangle. It's a bullish indicator.

Technically speaking, what happens is that an ascending triangle is a rally to a new high, followed by a pullback to an intermediate support level, then a second rally to test the first peak, followed by a second decline to a level higher than the intermediate-term support level and, finally, a rally to fresh new highs on strong volume.

Descending Triangle

A descending triangle is a decline to a new low on news that's followed by a rally to an intermediate resistance level, then a second decline to test the recent low, followed by a second rally toward (but not through) intermediate resistance. Then, finally, there's a decline to new lows on strong volume.

his happens when the Street becomes extremely bearish and, subsequently, a stock looks like it's done for.

But, as a new low is created, buyers -- often the smart money -- suddenly pile in.

Most analysts consider descending triangles to be the most reliable of all chart patterns because it's easy to define the supply-and-demand relationship.

Contracting or Symmetrical Triangle

A symmetrical triangle shows a rally to a relative new high, a pullback to an intermediate-term support level, a second rally that doesn't exceed the recent high, then a second decline that falls short of the intermediate-term support level and, finally, a breakout on strong volume above the trendlines created by linking the new high and the secondary high.

This, like most consolidating patterns, is due to traders' indecision. It occurs when traders' uncertainty leads them to do nothing.

Expanding or Reverse Symmetrical Triangle

Also known as a broadening top, an expanding triangle or a megaphone top, the reverse symmetrical triangle is a bearish indicator, and the technical implications are usually extreme.

It is a rally to a new high, weakness to an intermediate support level. Then it's a second rally to a higher high on increased volume and a decline through the intermediate support level. And, finally, there's a third rally to a higher high on strong volume, followed by an eventual collapse.