Important Reversal Patterns: the Triangles

We come next to an entirely different family of technical patterns, the Triangles, a group that has not been as well represented on the charts of the decade of the 1940s as it was during the 1920s and 1930s (EN10: In plentiful supply in modern markets of the 2000s). Their scarcity in that decade is regrettable because they are an intriguing lot with excellent profit potential. Before we examine them in detail, however, a quick review of the basic theory, which gives meaning and value to technical analysis, may be appropriate. That theory can be summarized in the following brief statements (see Figures 8.1 through 8.25).

  1. The market value of a security is determined solely by the interaction of supply and demand.
  2. Supply and demand are governed at any given moment by many hundreds of factors, some rational and some Information, opinions, moods, and guesses (shrewd or otherwise) as to the future combine with blind necessities in this equation. No ordinary man can hope to grasp and weigh them all, but the market does this automatically.
  3. Disregarding Minor Fluctuations, prices move in trends that persist for an appreciable length of time.
  4. Changes in trend, which represent an important shift in the balance between supply and demand, however caused, are detectable sooner or later in the action of the market

By this time, the fact expressed in the italicized words of the last statement may have begun to raise some misgivings in your mind. The complaint that the Dow Theory is often “late” has already been discussed. The Reversal Patterns studied in the two preceding chapters give no certain signal until after the trend has changed, usually “sooner” as compared with Dow Theory, but never at the absolute top or bottom price. The man who sells a stock as soon as, but not until, a Head-and-Shoulders Top has been completed on its chart may cash in on no more than half of the total decline from its extreme high to extreme bottom; this is due to the very terms of our measuring formula, the first half of the decline can have taken place before the Top Reversal Formation was finally confirmed.

Make up your mind that there is no help for it. Somebody managed to sell his shares at the very top eighth of a point on the peak of the Head (and some poor devil bought them). The seller was just plain lucky. His exploit can be truly compared with a hole-in-one in golf; even a complete duffer occasionally enjoys that thrill. But the more experienced a player, the better satisfied he is to land safely on the green and not too far from the cup. The more experienced an investor, the less concerned he is with getting the last point, or even the last 10 points, out of his market commitments.

No one can ever be sure at the time that he is selling at the final high. No rules or methods have ever been devised—or ever will be—to ensure buying within fractions of the Bottom or selling within fractions of the Top. Of course, a man can make certain of buying a stock at its absolute low provided he is prepared to take at that figure every  last

Triangle Reversal Formation
Figure 8.1 A fine Symmetrical Triangle Reversal Formation on a weekly chart. Upper boundary sloping down from February 1942 recovery high at 21 and lower boundary sloping up from “Pearl Harbor” Bottom at 16 3/8 converge to an apex of about 18 5/8. From this Major Bottom Pattern, “HD” advanced to 45 in 1946. Note the shrinkage in volume as a pattern formed and the increase as the price broke out through the Top in October 1942. Breakout came not quite three-quarters of the way over from the first Top to the apex.
Symmetrical Triangle Reversal at its Bull Market
Figure 8.2 Sears Roebuck made a Symmetrical Triangle Reversal at its Bull Market Top in 1946, and then it went into another long Triangle that turned out to be a Consolidation rather than Reversal Formation. (Logarithmic volume scaling minimizes volume variations.) Sell signal was given at 44 1/2 and again at 41. Decline continued to 30 1/2.
Symmetrical Triangle
Figure 8.3 Johns-Manville’s Primary Trend Reversal in 1942 developed out of a Symmetrical Triangle that also had some aspects of a Head-and-Shoulders Pattern with a long right shoulder. Although this is a weekly chart, the volume here is worthy of detailed study in connection with the price action. “JM” (old stock) advanced more than 100 points in the next four years.

share offered, even to the entire outstanding issue if necessary. It might, in theory, require as much as $3.7 billion to “put a bottom” under U.S. Steel at 70 (EN9: ca. 1950s) in case you are tempted.

The reader, who at this point may think we “protest too much,” will see more excuses for the foregoing remarks when we take up the habits of Triangles, for these formations are not always indicative of Trend Reversal. On the contrary, except in certain rather uncommon varieties, they are more apt to signal what may most conveniently be termed Consolidation, terminating an up or down move only temporarily and setting the stage for another strong move in the same direction later on. (Schabacker called such chart formations “Continuation Patterns.”) The reason for including Triangles in this section of our studies under the general heading of Reversal Formations is that they do, at times, develop at periods of Major Trend change, and those are, by all odds, the periods that are the most essential for the investor to recognize.

Symmetrical Triangles

The most common form of a Triangle is composed of a series of price fluctuations, each  of which is smaller than its predecessor, each Minor Top failing to attain the height of the preceding rally, and each Minor Recession stopping above the level of the preceding Bottom. The result is a sort of contracting “Dow Line” on the chart—a sideways price area or trading range whose Top can be more or less accurately defined by a down-slanting boundary line and whose Bottom can be similarly bounded by an up-slanting line. This type of Triangle is called a Symmetrical Triangle. If we wanted to make a more accurate application of  the language of geometry, we might better call it an Acute Triangle because it is not at

Symmetrical Triangle Bottom
Figure 8.4 Logarithmic price scaling on weekly chart emphasizes important technical developments at low price levels. “DH’s” Symmetrical Triangle Bottom started a Bull Market that reached 57 in 1945. Note the Throwback to apex of Triangle, not an uncommon development. The apex itself is a strong Support (see Chapter 13).

all necessary that its Top and Bottom boundaries be of equal length or, in other words, that they make the same angle with the horizontal axis. However, there is a very strong tendency in these formations to approximate the symmetrical form; so, the established name will do well enough. This pattern is also sometimes referred to as a “Coil.”

While the process of contraction or coiling, which makes up the price action of the Symmetrical Triangle Pattern, is going on, trading activity exhibits a diminishing trend, irregularly perhaps, but nevertheless quite noticeably as time goes on. The converging upper and lower boundary lines of the price formation come together somewhere out to the right (the future in the time sense) of the chart, at the apex of our Triangle. As prices work their way along in narrower and narrower fluctuations toward the apex, volume ebbs to an abnormally low daily turnover and, if we are dealing with a typical example, comes the action that first suggested the name “Coil.” Suddenly and without warning, as though a coil spring had been wound tighter and tighter and then snapped free, prices break out of their Triangle with a notable pickup in volume, and leap away in a strong move that tends to approximate in extent the up or down move that preceded its formation.

There is seldom any clue given on the one chart containing the Triangle to tell in which direction prices are going to break out of the pattern until that action finally occurs. Sometimes you can get a pretty good idea of what is likely to happen by observing what is going on at the same time in the charts of other stocks (which is an important topic for

Triangles often form as a part
Figure 8.5 Triangles often form as a part of a larger and more important pattern of some other type. Here a symmetrical figure constitutes the latter half of a Rounding Turn. Note the premature breakout on October 17, return to pattern, and then final breakaway on November 8.
A Major Symmetrical Triangle
Figure 8.6 Prices in this Symmetrical Triangle squeezed way out into the apex before erupting. Breakout at that stage is unreliable; above is a fair sample of the false moves that occur there. Real move was down.
A Major Symmetrical Triangle
Figure 8.7 Recovery rallies from “Panic” Bottoms are often capped by Triangles, for those are periods in which doubt and indecision are prevalent. The doubt in such cases, however, is usually resolved in favor of renewed decline. “Panic” Bottoms seldom hold. This chart shows a typical Symmetrical Pattern topping the recovery from the famous Selling Climax of October 19, 1937. Note Pullback to apex.

later discussion). Often, however, there is nothing to do but wait until the market makes up its mind which way to go. And “making up its mind” is just what the market seems to be doing when it builds a Triangle; everything about this pattern appears to exemplify doubt, vacillation, and stalling until finally a decision is reached.

Some cautions about Symmetrical Triangles

A compact, clean-cut Triangle is a fascinating picture, but it has its tricky features. The beginner in technical chart analysis is quite naturally prone to look for Triangles constantly, and will often think he has detected them when, in fact, something entirely different is in the process of development. Remember, it takes 2 points to determine a line. The top boundary line of a price area cannot be drawn until two Minor Trend Tops have been definitely established, which means prices must have moved up to and then down away from both far enough to leave the two peaks standing out clear and clean on the chart. A bottom boundary line, by the same token, cannot be drawn until two Minor Trend Bottoms have been definitely established. Therefore, before you can conclude that a Symmetrical Triangle is building, you must be able to see four Reversals of Minor Trend. If it comes after an advance in prices, you must first have a Top, next a Bottom, then a second Top lower than the first, and finally a second Bottom higher than the first Bottom (and prices must move up away from the second Bottom before you can be sure it is a Bottom). Then, and only then, can you draw your boundary lines and proceed on the assumption you have a Symmetrical Triangle.

A Major Symmetrical Triangle
Figure 8.8 A Major Symmetrical Triangle Top in which prices squeezed out into the apex and then produced a false move upside (see Figure 8.6). “VEC,” as a matter of fact, was a bad actor technically, but this particular breakout would be suspect anyway.
A Major Symmetrical Triangle
Figure 8.9 The other side of the story—an imposing Symmetrical Triangle which failed badly, although for the alert and experienced technician, there were warnings of something amiss in March and April. Eastern Airlines built, in late 1946 and early 1947, a formation which, so far as price pattern was concerned, left little to be desired. Prices broke out topside decisively in late March. A Throwback in April met normal Support at the upper Triangle boundary, but the subsequent advance fell short, weakened, and finally broke down, producing an “end run” around the apex. Warnings referred to were high and irregular volume, particularly on reactions, in February and March—not characteristic of valid Triangle development—and failure of prices to push up rapidly and vigorously after the April 14 Throwback.
A Major Symmetrical Triangle
Figure 8.10 A weekly chart. The seventh-month Consolidation area of 1944—in “NG,” undefinable at first, developed eventually into a typical Symmetrical Triangle. Two months after the high-volume breakout in January 1945, prices reacted nearly to apex level and then pushed away rapidly. Minimum measuring implications of this Triangle were satisfied at 16.
Symmetrical Triangle
Figure 8.11 A small Symmetrical Triangle that tended toward the “Ascending” type. Note that the higher volume that developed within this pattern in early January came on a rally. This sort of action is fairly typical of very “thin” stocks.
Symmetrical Triangle
Figure 8.12 An Ascending Triangle 10 months long, which was the start of a Major Bull Trend, carrying “ABN” to 45. Refusal of prices to react to the lower pattern boundary, as here in August 1942, is a frequent development in strong formations, a warning of near completion and breakout.
Symmetrical Triangle
Figure 8.13 Premature breakouts from Right-Angle Triangles, such as appeared in Celanese in March 1946, are temporarily disappointing to the trader who buys on them, but they eventually work out all right. Celanese, before its 1946 split, was subject to frequent and peculiar shakeouts, as here on March 9 and 26.
Symmetrical Triangle
Figure 8.14 A steep recovery from a Panic Bottom (the “Pearl Harbor” selling) flattened out into a fine Ascending Triangle. Note the horizontal Supply Line at 19, above a gradually rising Demand Line. The breakout at the end of September signaled initiation of an advance of some consequence. It turned out to be a Primary Bull Market, which took Briggs up to 53.
Symmetrical Triangle
Figure 8.15 Sears’ 1936 Bull Market Top was a Symmetrical Triangle, out of which it declined 15 points. An Ascending Triangle then produced an Intermediate Recovery to the Supply Zone (see Chapter 13) at the lower side of the top Triangle. Compare this chart with the 1946 Top in Figure 8.2.
Ascending Triangle
Figure 8.16 An Ascending Triangle at an Intermediate Bottom. This chart runs from April through August 1936. Extreme shrinkage in trading volume during this formation indicated a very strong technical situation.

Another point to remember—and one that does not conform at all to the “Coil” simile— is the farther out into the apex of the Triangle prices push without bursting its boundaries, the less force or power the pattern seems to have. Instead of building up more pressure, it begins to lose its efficacy after a certain stage. The best moves (up or down) seem to ensue when prices break out decisively at a point somewhere between half and three-quarters of the horizontal distance from the base (left-hand end) to the apex. If prices continue to move “sideways” in narrower and narrower fluctuations from day to day after the three-quarter mark is passed, they are quite apt to keep right on to the apex and beyond in a dull drift or ripple that leaves the chart analyst completely at sea. The best thing to do in such cases is go away and look for something more promising elsewhere in your chart book.

A third tricky point is that it becomes necessary sometimes to redraw one or both boundaries of a Triangle before it is finally completed (i.e., before prices break out and move away from it in a decisive fashion). This can happen, for example, when, after the first two Rally Tops have established a down-slanting upper boundary line, the third rally starting from the lower boundary pushes up and through the original Top line by a moderate

Ascending Triangle
Figure 8.17 One of the early 1947 disappointments (to the Bulls) was the failure of “AM” to break out topside from the long Ascending Triangle depicted above. Here is a case where supply at 15 finally overwhelmed demand. A pattern such as this indicates a potentially strong underlying situation for the long pull. Ordinarily, the consequence of an Ascending Triangle’s “failure” of this sort is the development either of an extended Rectangular base within the general range of the Triangle (in this case, 10 to 15), or formation of a Double Bottom at or near the earlier low (in this case near 10). However, “AM” dropped lower after several more attempts to overcome the Major Supply at the 15 level, which was not substantially penetrated until 1955.

margin and then, without developing a recognizable breakout volume on this move, stops short of surpassing the highest level of the preceding (second) pattern Top. When prices subsequently drop back again into pattern, it is necessary to abandon the original upper boundary line and draw a new one across the highs of the first and third rally tops.


How prices break out of a Symmetrical Triangle

Prices may move out of a Symmetrical Triangle either up or down. There is seldom, if ever, as said above, any clue as to direction until the move has actually started, that is, until prices have broken out of their triangular “area of doubt” in decisive fashion. In a very general way, the precepts laid down for breakouts from Head-and-Shoulders Formations apply here as well. For example, the margin by which prices should close beyond the pattern lines is the same, roughly 3%. It is equally essential that an upside break in prices be confirmed by a marked increase in trading volume; lacking volume, do not trust the price achievement. But a downside breakout, again as in the case of the Head-and-Shoulders, does not require confirmation by a pickup in activity. As a matter of record, volume does visibly increase in most cases, but in a majority of down breaks, it does not do so to any notable extent until after prices have fallen below the level of the last preceding Minor Bottom within the Triangle, which, as you can see, may be several points lower than the boundary line at the place (date) of the actual breakout.

The curious fact is a downside breakout from a Symmetrical Triangle attended to right from the start by conspicuously heavy volume is much more apt to be a false signal rather than the start of a genuine downtrend that will be worth following. This is particularly true if the break occurs after prices have worked their way well out into the apex of the Triangle; a high volume crack then frequently—we might even say usually—develops into

Ascending Triangle
Figure 8.18 The 1942 Bear Market Bottom in Socony–Vacuum was an unusual Head-and-Shoulders Formation, with the head consisting of an Ascending Triangle. Note the increase in volume on the breakout from the Triangle in July and again on the break through Head-and-Shoulders neckline in October.

a two- or three-day “shakeout,” which quickly reverses itself and is followed by a genuine move in the up direction.

All of the above the reader will have undoubtedly  found  most  disconcerting.  Here is a pretty technical pattern, and it cannot always be trusted. Unfortunately, Symmetrical Triangles are subject to false moves to a far greater extent than the Head- and-Shoulders Formation or any of the other formations we have discussed or will discuss later. Unfortunately, some of these false moves cannot be identified as such until after a commitment has been risked (although good trading tactics should prevent their occasioning much more than a trivial loss). Unfortunately again, even a typical shakeout, such described in the preceding paragraph, may produce a double cross, proceeding right on down in a genuine decline. No technical chart formation is 100% reliable and, of all our present subject, is the worst offender.

But most Symmetrical Triangles—lacking an actual statistical count, our experience would suggest more than two-thirds of them—behave themselves properly, produce no false signals that cannot be spotted before any damage is done. Upside breakouts on high volume may be premature in the sense that prices return to pattern and do some more “work” there before the genuine uptrend gets under way, but they seldom are false. We shall have a little more to say about false signals in this chapter and more later on that we trust will be helpful in developing the experience a trader needs to defend himself against them.

Ascending Triangle
Figure 8.19 Due to a dividend of $1.00 went ex on March 14, the lower boundary of this Descending Triangle Top in “BIW” had to be dropped 1 point from 33 and redrawn at 32. Despite the added leeway thus afforded, however, the original pattern implications were quickly carried out. Prices pulled back three times to the new lower boundary line of this Triangle on April 4, April 16, and May 31—unusual, but explained by the existence of a strong general market uptrend during this period. Whenever a stock goes ex-dividend during the formation of an Area Pattern of any type, the lines bounding that pattern should immediately be adjusted to the new value by lowering them a distance corresponding to the amount of the dividend.

A typical Triangle development

The several actual chart examples of Symmetrical Triangles that illustrate this chapter will serve, we trust, to give the reader a working acquaintance with their appearance in various manifestations. Yet  it may help to clear up some of the more important points if we describe in detail just how a typical pattern develops step by step. Let us suppose you are watching a stock on your charts that has climbed, with only the normal, brief hesitations and inconsequential reactions, from around 20 to 30, 32, 35, and is still moving up. (Let’s hope you bought it at 20!) Lower down, its turnover ran between 300 and 600 shares daily, but now, above 30, it has attracted quite a following, and daily volume has increased to around 1,000. As it approaches 40, activity shoots up to nearly 2,000 shares, the market “churns” between 39 and 40, and then prices begin to drop. As they fall back, you (especially if you own the stock) watch it with some concern, but you know it is hardly likely that it is going to go straight down again to 20; stocks do not act that way. (EN9: Sometimes they do now, in the twenty-first century.) If the trend of this issue has actually been reversed, it should, nevertheless, spend some more time and effort around its top levels and make some sort of a Distribution Pattern.

Ascending Triangle
Figure 8.20 On the basis of “fundamentals,” Revere was an attractive holding in 1946, which may account for its reluctance to “give up” when the market generally started downhill in earnest in June of that year. Its fluctuations from mid-May to late August constructed a fine, large Descending Triangle, in which, however, Bearish Volume Signals had already appeared in late June and on July
23. The breakout came (with a wide Breakaway Gap) on August 27. Prices clung to the edge of the pattern for four days and then collapsed. The small formations outlined in April and May are Flags, to be discussed in Chapter 11.

The decline continues for 10 days with the turnover also declining quite appreciably. By the time prices have worked back to 33, volume is running at about 700 shares daily. At 33, it may pick up again for a single day to 800 or 900 shares, but the reaction stops there, and after a day or two, prices begin to climb again with little change in their turnover rate. In eight or nine days, quotations have gotten back into the upper 30s and activity increases and reaches, say, 1,200 shares on the day 39 is reached. Instead of going on to 40 or beyond, however, a new reaction sets in and prices drift back to 37. (Perhaps you will find this growing picture easier to visualize if you pencil its development on a scrap of chart paper.) Now it is evident that a second Top has formed at 39; you can now draw a tentative pattern line (there are other names for this, as we shall see later) on your chart across the two extreme high ranges (not closing prices), which will slant downward from left to right. So far you have only one Bottom point, so you cannot draw lines from that, but this second decline brings out even less trading activity than the first. Volume ebbs to 400 shares and the down move halts at 34; the price track “rounds out” and turns up again; trading is very dull, but it begins to pick up as 36 is reached.

This action defines a second Minor Bottom and now you can draw a Bottom “tangent,” an up-slanting line across the extreme low prices registered on the two reactions, the first at 33 and the second at 34. Your two pattern lines will converge, meeting near the 36H

Ascending Triangle
Figure 8.21 The 1937 Bull Market Top in Westinghouse was this Descending Triangle, which started in January and broke on February 15. Prices hung at the lower edge of the Triangle for four days, fell away, and then pulled back to its lower line on March 4 at the time when the general market Averages were making their final Bull highs.

level about four weeks ahead (i.e., to the right) on your chart. You have a Symmetrical Triangle—but you do not know whether prices are going to fall out of it eventually or shake off present doubts and push up in a new advance worth following. You can only watch further developments very closely and be prepared to take whatever action is, in due time, indicated.

The second rally picks up a little in activity, attains a daily turnover of about 700 shares, and pushes up to 38 and on for part of a day to 38 3/4. This nudges through the previously drawn pattern line by perhaps a quarter of a point (because each swing is shorter in points traveled and, accordingly, in duration). But the volume on this Minor Penetration is less than on the preceding Top (at 39) and buying again ebbs. As the price range line falls back to 37 and 36, draw a new upper tangent across the first Top at 40 and the last Top at 38½. There is the suggestion here in this slight “lift” that the balance may be swinging slightly to the demand side, but do not count on it. Pinpoint accuracy is not to be expected; Triangles must be allowed some leeway.

On the third reaction, activity dwindles away to the lowest yet. The up-slanting Bottom boundary will be reached at about the 35 level, if prices continue their present course. It is worth noting now whether they will come all the way down to it this time because if they do not—if their recession is halted half a point or so above it—that action would give some significance to the previous bulge through the upper boundary. But this does not happen; the drift continues right on down to 35, and now volume is running at the rate of only 200 shares daily, less than it ran in the early stages of the original advance above 20. This is a critical spot. The price track flattens out momentarily, turns up feebly, yet keeps hitching

Ascending Triangle
Figure 8.22 A series of Triangles, Symmetrical and Descending, which evolved during the 1929–1932 Bear Market in Hudson Motors. Note that at no time during this decline did anything resembling a Major Bottom appear. Note also how each Triangle’s measuring implications were carried out before any temporary halt or consequential rally developed. Follow your daily charts for the proper timing of your trading operations but keep an eye always on the long-range pictures that evolve on weekly and monthly projections, so as to maintain your perspective on the Major Trend.

up, crosses 36½, picks up activity, reaches the (new) upper Triangle boundary at 37½ and, on the next day, punches through on a turnover of 1,500 shares to close at 39⅛. This is a breakout; the doubt is resolved and (barring a false move, unlikely at this point) the trend is once again up. Note that it was not necessary for prices to surpass the previous high at 40 to produce this signal—that is one of the interesting things about Symmetrical Triangles.

Ascending Triangle
Figure 8.23 The curious, and in its early stages confusing, Major Bottom Formation that American Rolling Mills constructed in 1941–1943. The recovery from the “Pearl Harbor Panic” of 1941 ran into a large Symmetrical Triangle that broke out on the downside in April 1942. The subsequent decline satisfied the measuring requirements of that Triangle, but it did not carry below the December low. The rally of June and reaction of August–September built the whole area out into another and larger Symmetrical Triangle, out of which prices broke on the upside in September. Then the reaction to the apex of the latter, in December 1942, and the following advance built up into a 15-month Ascending Triangle, which constituted the final Major Bottom for a trend that carried prices up eventually to 42 in 1946. The low volume on the June and August–September reactions, the increase on the October markup, and, even more, the January 1943 rise and breakout in February were unmistakably of Major Bullish implications. It takes time, remember, to build a foundation for a Bull Market.

Reversal or Consolidation

We started to discuss Symmetrical Triangles as Reversal Patterns, yet our example has turned out to be, instead, a Consolidation Pattern, that is, only a sort of resting stage in a continued uptrend. Well, three out of four of these formations will turn out to be just that; the fourth is the dangerous one (if you own the stock). How would it differ?

The example described might have been a Reversal instead of a Consolidation Formation any time up to the point of the decisive breakthrough to 39. If it had been a typical Reversal, the first change probably would have appeared shortly after the final rally started up from the third Bottom at 35. That rally would have petered out at about 36½, and prices would have started to drift back again. Then, with the activity increasing slightly, the Bottom boundary would be penetrated. As quotations dropped to 34, daily volume might mount to 600 or 700 shares. Any further decline would constitute a down signal, resulting in a further pickup in turnover and an acceleration in the price decline as the stop-loss orders (to be discussed later) spotted under 34 were “touched off.”

Before we leave our typical example, we might make some mention of the post-breakout reactions or Pullbacks that sometimes occur. As in the case of the Head-and-Shoulders

Figure 8.24 A beautifully compact Ascending Triangle that turned out to be the Major Bear-to- Bull Reversal in Goodrich in 1942. The breakout from this pattern (in April) was not signaled by any extraordinary pickup in activity so far as this weekly record shows (but remember significant volume detail is often hard to see in a weekly plotting). The Triangle’s measuring implications were carried out by the first upswing, which reached 18 14 at the end of May. Supply had to be absorbed in the 18 to 21 range (refer to this chart when you study Support and Resistance in Chapter 13), but a Major Up Signal was given in September when prices erupted through that zone with a conspicuous increase in trading volume.

Formation, the initial breakout move from a Symmetrical Triangle may halt before prices are carried very far away from the pattern and be followed by a Minor Reaction, usually lasting only two or three days, which will carry quotations back to the nearest pattern boundary. Thus, in our first example in which the break, when it came, took our stock  up through the top side to 39⅛, the next day might have seen a push on to 40, and then prices might have backed off again in a couple of days of decreased activity to 37½ or 38. The up-move would then normally be resumed with greater vigor. Downside breakouts are sometimes followed in much the same manner by pullbacks to the lower boundary

Figure 8.25 A real-time chart from The volume blowout in July 2002 drew attention to eBay and the sloping line was drawn at that time. Although the lines are sloppy and the pattern is ragged, it looked at the time like a Descending Triangle with all its implications. Nevertheless, when it broke out of the pattern on emphatic volume in October 2003 the handwriting was on the wall. eBay was for real. So, what’s for real? It could really make money, not just capture free eyeballs, like its internet brethren and sistern. It actually performed a service of economic benefit to many people, unlike the internet fantasy follies. See Figure 10.26 for a longer perspective on eBay. Lessons for the attentive: power of trendlines; alarm-clock nature of unusual volume; not believing any forecast. Forecast in this case would have been for a downtrend if, as it seemed, the pattern was a descending triangle.

Another matter we might take up before going on to study the next formation is the rationale of the Symmetrical Triangle. It may help to fix its characteristics in mind if we try to deduce what sequence of events might typically produce it. Of course, any effort of this sort can result only in a gross oversimplification, which will not fit all of the Triangle’s various manifestations, but it is an interesting mental speculation—and one not without benefit to our understanding of the general theory of chart formations. Let us turn back again to our typical example. We started with a stock that ran up rather steadily from around 20 to 40 and then reacted. It is fairly obvious what happened at 40: many investors had substantial paper profits, approaching 100% at that price. (A “round figure” such as 40, 50, 75, or 100 is apt to become a sort of mental profit objective and, hence, bring in increased selling.) Some of them were ready to cash in and did so, temporarily swinging the technical balance from demand to supply; they sold less freely, of course, as prices receded. Other would-be investors had been attracted to the stock, but too late to “get aboard” below 30. Unwilling to “chase” it up to 40, they welcomed the reaction and, by the time prices had dropped back to 33, enough of them were ready to buy to swing the balance back again to the demand side of the equation.

Watching the ensuing rally, however, were the owners of the stock who had failed to grab their profits near 40 on the previous advance and had made up their minds to be a little less greedy if given a second opportunity. Their offerings began to come in above 37, say, and were sufficiently copious at 39 to stem the advance at that level. Behind the scenes, we can imagine this process repeated again and again, with new money constantly coming in and meeting supply from owners increasingly anxious to cinch their profits. Eventually, the offerings of the latter are all absorbed, or perhaps withdrawn, and then professionals, as well as hopeful investors, suddenly discover there is no stock ahead on the books and rush to buy results.

Since the advance (or decline) that follows the completion of a Symmetrical Triangle usually runs to worthwhile trading proportions (we shall discuss measuring implications later), there would be an evident advantage to the trader who could tell in advance of the breakout which way prices were going to move. The odds are, as already stated, the new move will proceed in the same direction as the one before the Triangle’s formation. These odds are greatest, of course, in the early stages of either a Primary Bull or Bear Market with the chances of Reversal increasing as those Major Trends mature. Nevertheless, the charts of other stocks often furnish valuable collateral evidence; thus, if at the same time you detect a Symmetrical Triangle in the process of formation in “PDQ,” a majority of your charts are showing Saucers or Head-and-Shoulders Bottoms or Ascending Triangles or some other pattern of typically Bullish import, it is a fair assumption that your Symmetrical Triangle will break out topside. There are times when advance indications of this sort are strong enough to justify taking a position on it.

The Right-Angle Triangles

We mentioned Ascending Triangles in the preceding paragraph. The Ascending and Descending are the Bullish and Bearish manifestations, respectively, of our next class of patterns, the Right-Angle Triangles. In many respects, in most in fact, they perform like their Symmetrical cousins, but with this very gratifying difference: they give advance notice of their intentions. Hence, their names, for the supposition always is that prices will ascend out of the Ascending form and descend from the Descending form.

The Symmetrical Triangles, as we have seen, are constructed of a series of successively narrower price fluctuations that can be approximately bounded across their Tops by a down-sloping line and across their Bottoms by an up-sloping line. Right-Angle Triangles are distinguished by the fact that one of their boundaries is practically horizontal, whereas the other slants toward it. If the top line is horizontal and the bottom line slopes up to meet it somewhere out to the right of the chart (at the apex), the Triangle is of the Ascending persuasion. If the bottom line is horizontal and the top line slopes down, the Triangle is Descending.

These formations are perfectly logical and easy to explain. The Ascending Triangle, for instance, pictures in the simplest and most normal form what happens when a growing demand for a certain stock meets a large block of shares for sale at a fixed price. If the demand continues, the supply being distributed at that price will eventually be entirely absorbed by new owners looking for still higher levels, and prices will then advance rapidly. A typical Ascending Pattern starts to develop in much the same way as the “ideal” Symmetrical Triangle previously described, with an advance in our certain stock from 20 to 40 at which point sufficient supply suddenly appears on the market to fill the orders of all buyers and produce a reaction. Sensing the temporary satiation of demand, some owners may dump their holdings on the decline, but offerings are soon exhausted as prices drop back to, say, 34, and renewed demand then stimulates a new rally. This runs into supply again at 40, and again, all buyers are accommodated at that level. The second recession, however, carries quotation down only to 36 before another up-move develops. But the pool or inside group that is distributing at 40 still has some of its holdings left to sell, so it may take more time, another backing away and another attack at the 40 line before the supply there is exhausted and the trend can push along up.

A planned distribution

This type of market action evidences a planned campaign by owners of a fairly large quantity of shares to liquidate at a predetermined price. It contains little of the element of doubt that we mentioned as characterizing the Symmetrical Pattern. So long as demand persists, the distributing pool knows it can ultimately cash in its entire line at 40 and need not sell for less. It is equally apparent, so long as demand keeps coming in at higher and higher levels that, once the supply at 40 has all been absorbed, the market will advance rapidly and easily. As soon as prices break out above 40, those who took over the supply  at that figure will feel their judgment has been vindicated and will not be disposed to sell until they, in turn, can register a good profit.

The crux of the matter is contained in the two preceding sentences. Demand must continue to come in at higher and higher levels, otherwise, our formation will cease to be an Ascending Triangle. Plus, the overhead supply must eventually be absorbed, permitting an upside breakout. If demand begins to falter any time before the Supply Line (horizontal Top boundary) has been broken through, the ensuing reaction may drop prices down “out of pattern,” and then the chart technician is faced with the necessity of revising his chart picture. One might think that such a development, blasting the earlier promise of the chart, would occur fairly often, but, as a matter of experience, it is surprisingly rare. We say “surprisingly” because it is obvious that in many cases of Ascending Triangle development, the group selling creates its Top boundary or Supply Line must believe that level to be just about as high as the stock has any right to go. As holders of a large enough block to influence the market for several weeks, sometimes months, their judgment is hardly to be scorned. Yet, once it becomes evident the lower boundary or Demand Line is slanting up, the odds are certainly somewhere in the neighborhood of 9–1 that the new buyers will eventually have the best of it.

On occasion, the third reaction or fourth reaction within an Ascending Triangle Formation will break down through the previously established up-slanting Demand Line (lower boundary), but it will be halted at the same level as the previous reaction. The pattern from there on is apt to develop as a Rectangle, a formation to be discussed in our next chapter, and should be treated as such. (The tactics of trading on Ascending and Descending Triangles, including protection against the rare cases of collapse, will be taken up in Section II.)

Descending Triangles

Descending Triangles have a horizontal lower boundary or Demand Line and a down- sloping upper boundary or Supply Line. It is evident they are created by reverse market conditions than those of the Ascending Pattern; however, their implications are equally strong and their failures equally rare. Development of a Descending Formation hinges on a campaign by a group or syndicate (often an investment trust) (EN9: or Mutual Fund or a takeover group) to acquire a large block of shares in a certain company at a predetermined price below the market. Their orders are placed and allowed to stand until executed at that level. If the successive rallies therefrom, which their buying generates, are stifled by new supplies of stock for sale at lower and lower levels (thus creating the typical Descending picture on the chart), orders to buy are eventually all filled and quotations break through and on down. The mere breaking of the critical line, which many traders have seen function as a support under the market for a more or less extended period, often shakes the confidence of holders who had not previously considered selling. Their offerings now come on the market and accelerate the decline.

Volume characteristics same as the Symmetrical type

The volume section of the Right-Angle Triangle’s chart requires little comment. It will ordinarily present a picture practically identical with that accompanying the development of a Symmetrical Triangle. Activity tends to lessen as prices move out toward the apex.  In the Ascending Formation, there will usually be a pickup on each rally and an ebb in turnover on each decline within the pattern; in the Descending Formation, the opposite  is true, but sometimes it is not quite so evident. These Minor fluctuations do not affect the overall diminishing trend of volume until the breakout point is reached.

As to breakouts, practically everything discussed about the Symmetrical Triangle will apply as well to the Right-Angle type. Upside breakouts (from an Ascending Pattern, of course) are attended by a conspicuous increase in trading volume; if not, they should be treated as suspect. Downside breakouts (from Descending Patterns) may not evince much of a pickup in activity, but turnover usually speeds up the second or third day out of pattern. Throwback reactions to the pattern’s boundary line after a breakout are fairly common; their occurrence seems to depend largely on general market conditions. Thus, if prices break down out of a Descending Triangle in an individual stock at a time when the rest of the market is firm, a Pullback Rally is fairly certain to intervene before any extensive further decline takes place.

This chart, and a number that have preceded it, illustrate an important point for the market technician that may well be restated here: When a large number of individual issues, after an extensive advance, make well-defined Reversal Patterns of plainly Bearish import, break down out of them, and then succeed only in pulling back no farther than their lower boundaries or “Resistance Lines” at a time when the Averages are going on  up to new highs, the whole market is in a dangerous condition and a Major Downturn   is imminent. Divergences of this particular sort between many important issues and the Averages seldom develop at Intermediate Turns. The warning is particularly pointed when stocks of the caliber of Westinghouse, DuPont, General Motors, and others fail to “confirm” new highs in the Averages.

Refer back to Figures 6.3, 6.6, 6.9, and 8.15, for example, and compare the “timing” in those with the trend of the Averages for the same periods. The Saucer-Like Reaction Pattern of October to January in the above chart analyzes into a Complex Head-and-Shoulders Consolidation, a formation that will be taken up in Chapter 11.

Incidentally, “WX” continued on down to 130 in April 1937, made a Rectangle base there, and recovered to 158 (see above Descending Triangle) in August and then fell to 88 in November. Compare this daily chart with the monthly chart of “WX” for 1935 to 1938 in Figure 15.15.

Good, reliable breakouts from Right-Angle Triangles usually occur at about the same stage of pattern completion as they do in Symmetrical Triangles. The earlier the breakout, the less apt it is to be a false move (although false moves from Right-Angle Formations are considerably rarer, it should be noted, than from Symmetrical). In those infrequent cases when prices “squeeze” right on out of the apex without producing a definite breakout, the pattern seems to lose much of its power.

Measuring implications of Triangles

In Chapter 6, we stated a minimum measuring rule to apply to price movements developing from a Head-and-Shoulders Formation, and we can lay down a somewhat similar rule for Triangles—one that applies to both the Symmetrical and the Right-Angle species. The method of deriving the Triangle formula is not easy to explain in words, but the reader can familiarize himself with it quickly by studying its application on several of the actual examples that illustrate this chapter. Assuming we are dealing with an up-movement (upside breakout), draw from the Top of the first rally that initiated the pattern (in other words, from its upper left-hand corner) a line parallel to the Bottom boundary. This line will slope up away from the pattern to the right. Prices may be expected to climb until they reach this line. Also, as a rule, they will climb, following their breakout from the pattern, at about the same angle or rate as characterized their trend before entering the pattern. This principle permits us to arrive at an approximate time and level for them to attain the measuring line. The same rules apply (but measuring down, of course, from the lower left corner) to a descending move.

Although application of the above formula does afford a fair estimate of the extent of move to be expected from a Triangle, it is neither as definite nor as reliable as the Head-and- Shoulders formula. Do not forget the important qualification that the Triangle has somehow lost a part of its potential strength if the breakout is delayed until prices are crowded into the apex.

Triangles on weekly and monthly charts

We have seen in preceding studies how Head-and-Shoulders Formations may appear on the long-range (weekly or monthly) charts and will have importance commensurate with their size. Triangles also may develop on weekly charts with their implications usually clear and dependable, but the coarse Triangular Patterns—which can be found on graphs of monthly price ranges, especially the great, loose convergences that take years to complete— had better be dismissed as without useful significance.

Other Triangular formations

There are other patterns of price consolidation or congestion that can be bounded by converging lines and might, therefore, be classified as Triangles. However, they deviate from the true Triangles of this chapter so markedly in one or more important respects that they are best treated under other headings elsewhere, such as Flags, Pennants, and Wedges. Still another group of chart patterns develops between diverging boundary lines, on which account they have sometimes been called Inverted Triangles. But their causes, characteristics, and forecasting implications are so radically different that we have chosen to rename them Broadening Formations and discuss them in a later chapter.

The reader may have become dismayed at this point by our frequent recourse to such qualifying adverbs as usually, ordinarily, and the like. It cannot be avoided if one wishes to present a true picture of what actually happens. No two chart patterns are ever precisely alike; no two market trends develop in quite the same way. History repeats itself in the stock market, but never exactly. Nevertheless, the investor who familiarizes himself with the historical pattern, with the normal market action, and refuses to be tempted into a commitment in the belief that “this time will be different,” will be far and away ahead of the fellow who looks for the exception rather than the rule.

The beginner is proverbially lucky. He will find Triangles, Head-and-Shoulders, or other significant patterns, one after the other, on his charts, watch them develop, and see them carry through with profitable moves according to rule, until the exception comes along—or he will overlook the larger picture while concentrating on some Minor Pattern development—and suddenly awake to the fact he is caught in a very bad play. Hence,  we constantly emphasize the nonconforming movements. Our words of qualification are necessary because technical analysis of market action is not an exact science and never will be.

Mở Tài Khoản Chứng Khoán VPS

Trả lời