Ascending and Descending Triangles

THE ASCENDING TRIANGLE

The ascending and descending triangles are variations of the sym­metrical, but have different forecasting implications. Figures 6.3a and b show examples of an ascending triangle. Notice that the upper trendline is flat, while the lower line is rising. This pattern indicates that buyers are more aggressive than sellers. It is consid­ered a bullish pattern and is usually resolved with a breakout to the upside.

Both the ascending and descending triangles differ from the symmetrical in a very important sense. No matter where in the trend structure the ascending or descending triangles appear, they have very definite forecasting implications. The ascending triangle is bullish and the descending triangle is bearish. The sym­metrical triangle, by contrast, is inherently a neutral pattern. This does not mean, however, that the symmetrical triangle does not have forecasting value. On the contrary, because the symmetrical

Figure 6.3a An ascending triangle. The pattern is completed on a deci­sive close above the upper line. This breakout should see a sharp increase in volume. That upper resistance line should act as support on subsequent dips after the breakout. The minimum price objective is obtained by measuring the height of the triangle (AB) and projecting that distance upward from the breakout point at C.

Figure 6.3b The Dow Transports formed a bullish ascending triangle near the end of 1997. Notice the flat upper line at 3400 and the rising lower line. This is normally a bullish pattern no matter where it appears on the chart.

triangle is a continuation pattern, the analyst must simply look to see the direction of the previous trend and then make the assump­tion that the previous trend will continue.

Let's get back to the ascending triangle. As already stated, more often than not, the ascending triangle is bullish. The bullish breakout is signaled by a decisive closing above the flat upper trendline. As in the case of all valid upside breakouts, volume should see a noticeable increase on the breakout. A return move back to the support line (the flat upper line) is not unusual and should take place on light volume.

Measuring Technique

The measuring technique for the ascending triangle is relatively simple. Simply measure the height of the pattern at its widest point and project that vertical distance from the breakout point. This is just another example of using the volatility of a price pat­tern to determine a minimum price objective.

The Ascending Triangle as a Bottom

While the ascending triangle most often appears in an uptrend and is considered a continuation pattern, it sometimes appears as a bottoming pattern. It is not unusual toward the end of a down­trend to see an ascending triangle develop. However, even in this situation, the interpretation of the pattern is bullish. The break­ing of the upper line signals completion of the base and is con­sidered a bullish signal. Both the ascending and descending trian­gles are sometimes also referred to as right angle triangles.

THE DESCENDING TRIANGLE

The descending triangle is just a mirror image of the ascending, and is generally considered a bearish pattern. Notice in Figures 6.4a and b the descending upper line and the flat lower line. This pat­tern indicates that sellers are more aggressive than buyers, and is usually resolved on the downside. The downside signal is registered by a decisive close under the lower trendline, usually on increased volume. A return move sometimes occurs which should encounter resistance at the lower trendline.

The measuring technique is exactly the same as the ascending triangle in the sense that the analyst must measure the height of the pattern at the base to the left and then project that distance down from the breakdown point.

The Descending Triangle as a Top

While the descending triangle is a continuation pattern and usu­ally is found within downtrends, it is not unusual on occasion for the descending triangle to be found at market tops. This type of pattern is not that difficult to recognize when it does appear in the top setting. In that case, a close below the flat lower line would sig­nal a major trend reversal to the downside.

Figure 6.4a A descending trian­gle. The bearish pattern is complet­ed with a decisive close under the lower flat line. The measuring tech­nique is the height of the triangle (AB) projected down from the breakout at point C.

Figure 6.4b A bearish descending triangle formed in Du Pont during the autumn of 1997. The upper line is descending while the lower line is flat. The break of the lower line in early October resolved the pattern to the downside.

The Volume Pattern

The volume pattern in both the ascending and descending trian­gles is very similar in that the volume diminishes as the pattern works itself out and then increases on the breakout. As in the case of the symmetrical triangle, during the formation the chartist can detect subtle shifts in the volume pattern coinciding with the swings in the price action. This means that in the ascending pat­tern, the volume tends to be slightly heavier on bounces and lighter on dips. In the descending formation, volume should be heavier on the downside and lighter during the bounces.

The Time Factor in Triangles

One final factor to be considered on the subject of triangles is that of the time dimension. The triangle is considered an intermediate pattern, meaning that it usually takes longer than a month to form, but generally less than three months. A triangle that lasts less than a month is probably a different pattern, such as a pen­nant, which will be covered shortly. As mentioned earlier, trian­gles sometimes appear on long term price charts, but their basic meaning is always the same.

THE BROADENING FORMATION

This next price pattern is an unusual variation of the triangle and is relatively rare. It is actually an inverted triangle or a triangle turned backwards. All of the triangular patterns examined so far show converging trendlines. The broadening formation, as the name implies, is just the opposite. As the pattern in Figure 6.5 shows, the trendlines actually diverge in the broadening forma­tion, creating a picture that looks like an expanding triangle. It is also called a megaphone top.

The volume pattern also differs in this formation. In the other triangular patterns, volume tends to diminish as the price swings grow narrower. Just the opposite happens in the broaden­ing formation. The volume tends to expand along with the wider price swings. This situation represents a market that is out of control

Figure 6.5 A broadening top. This type of expanding triangle usually occurs at major tops. It shows three successively higher peaks and two declining troughs. The violation of the second trough completes the pattern. This is an unusually difficult pattern to trade and fortunately is relatively rare.

and unusually emotional. Because this pattern also represents an unusual amount of public participation, it most often occurs at major market tops. The expanding pattern, therefore, is usually a bearish formation. It generally appears near the end of a major bull market.

FLAGS AND PENNANTS

The flag and pennant formations are quite common. They are usu­ally treated together because they are very similar in appearance, tend to show up at about the same place in an existing trend, and have the same volume and measuring criteria.

The flag and pennant represent brief pauses in a dynamic market move. In fact, one of the requirements for both the flag and the pennant is that they be preceded by a sharp and almost straight line move. They represent situations where a steep advance or decline has gotten ahead of itself, and where the mar­ket pauses briefly to "catch its breath" before running off again in the same direction.

Flags and pennants are among the most reliable of contin­uation patterns and only rarely produce a trend reversal. Figures 6.6a-b show what these two patterns look like. To begin with, notice the steep price advance preceding the formations on heavy volume. Notice also the dramatic drop off in activity as the con­solidation patterns form and then the sudden burst of activity on the upside breakout.

Construction of Flags and Pennants

The construction of the two patterns differs slightly. The flag resembles a parallelogram or rectangle marked by two parallel trendlines that tend to slope against the prevailing trend. In a downtrend, the flag would have a slight upward slope.

Figure 6.6a Example of a bullish flag. The flag usually occurs after a sharp move and represents a brief pause in the trend. The flag should slope against the trend. Volume should dry up during the formation and build again on the breakout. The flag usually occurs near the midpoint of the move.

Figure 6.6b A bullish pennant. Resembles a small symmetrical trian­gle, but usually lasts no longer than three weeks. Volume should be light during its formation. The move after the pennant is completed should dupli­cate the size of the move preceding it.

The pennant is identified by two converging trendlines and is more horizontal. It very closely resembles a small symmet­rical triangle. An important requirement is that volume should dry up noticeably while each of the patterns is forming.

Both patterns are relatively short term and should be com­pleted within one to three weeks. Pennants and flags in down­trends tend to take even less time to develop, and often last no longer than one or two weeks. Both patterns are completed on the penetration of the upper trendline in an uptrend. The breaking of the lower trendline would signal resumption of downtrends. The breaking of those trendlines should take place on heavier volume. As usual, upside volume is more critically important than down­side volume. (See Figures 6.7a-b.)

Measuring Implications

The measuring implications are similar for both patterns. Flags and pennants are said to "fly at half-mast" from a flagpole. The flagpole is the prior sharp advance or decline. The term "half- mast" suggests that these minor continuation patterns tend to

Figure 6.7a A bullish flag in International Paper. The flag looks like a dawn-sloping parallelogram. Notice that the flag occurred right at the halfway point of the uptrend.

appear at about the halfway point of the move. In general, the move after the trend has resumed will duplicate the flagpole or the move just prior to the formation of the pattern.

To be more precise, measure the distance of the preceding move from the original breakout point. That is to say, the point at which the original trend signal was given, either by the penetra­tion of a support or resistance level or an important trendline. That vertical distance of the preceding move is then measured from the breakout point of the flag or pennant—that is, the point at which the upper line is broken in an uptrend or the lower line in a downtrend.

Summary

Let's summarize the more important points of both patterns.

Figure 6.7b A couple of pennants are flying on this Caterpillar chart. Pennants are short term continuation patterns that look like small symmetrical triangles. The pennant to the left continued the uptrend, while the one to the right continued the downtrend.

1. They are both preceded by an almost straight line move (called a flagpole) on heavy volume.
2. Prices then pause for about one to three weeks on very light volume.
3. The trend resumes on a burst of trading activity.
4. Both patterns occur at about the midpoint of the market move.
5. The pennant resembles a small horizontal symmetrical tri­angle.
6. The flag resembles a small parallelogram that slopes against the prevailing trend.
7. Both patterns take less time to develop in downtrends.
8. Both patterns are very common in the financial markets.