Wednesday, January 18, 2017

Continuation Patterns

This article was written in 2007. 


In the last issue we shared how to trade short term price patterns. In this article we will share another form of price patterns known as the triangles or continuation patterns where price is expected to breakout after consolidations. They are also well known as intermediate or near term patterns.  Although they are essentially continuation patterns, but sometimes they act as reversal pattern as well. Let's begin our discussion with a introduction to ascending triangle.

The ascending triangle will have a flat resistance and a series of higher lows.  While the price met with resistance at one particular price, it must be observed that buyers are very keen and that the dips from the resistance is higher one after another.  Breakout happens when the resistance finally gives way.  Ascending triangle breakout is biased to the upside and one should note where the breakout occurs.  The best breakout of triangles happens away from the apex of the triangle.

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Figure 1: ascending triangle example


As shown in Figure 1, the price chart of Boustead shows a resistance at $2.03 thereabouts.  For 3 months from Apr'07 to Jun'07, it is unable to breakout from this resistance.  However, it must be noted that the price retracement from the resistance achieved the higher low characteristic.  This is a very bullish sign as it meant that investors are very keen to buy and the buying pressure is strong as the price is unable to trade lower. On late June'07, the price broke out of the resistance and went on to new high.  Do note that it is away from the apex of the triangle.

Second in line is descending triangle. As the name suggest this price pattern is biased to the downside. Instead of a flat resistance as in the case of an ascending triangle, for a descending triangle we will be looking out for a flat support. The price will have seem to have found support at a particular price and that gives investors an impression that the price seems to be holding at this level very well. Not obvious to the untrained eyes, every price rally is actually getting lower. Then a breakout to the downside will catch investors unaware.  

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Figure 2: descending triangle example



As shown in figure 2, the price chart of Unionmet shows a flat support at $0.51  thereabouts.  For nearly 3 months, the support gave a false sense of security to investors because while the support is holding well, every price rally is getting lower and lower.  It is suggesting strong overhead selling at every rebound.  Investors should be cautious of such characteristic.  This is a very bearish sign as it meant that investors are very keen to sell and the selling pressure is strong as the price is unable to trade higher.  In middle of Jul'07, the price broke out of the support and went on to new low.  Do note that it is away from the apex of the triangle.

Last but not least, symmetrical triangle.  This price pattern can breakout either to the upside or downside.  Price will trade lower high as well as higher low, converging towards the apex of the triangle.  It's like the buyers and sellers are very balanced in power and the price was traded in a converging manner until a breakout to either side happens.

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Figure 3: symmetrical triangle example


As shown in figure 3, the price chart of HiapHoe shows converging lower highs and higher lows.  While the ascending and descending triangle pattern dictate the market tone, where it is bullish and bearish respectively, symmetrical triangle dictates a balance between buyers and sellers.  Hence it is only after a break to either side then only can we conclude whether it is trending higher or lower.  From early Nov'07 to late Dec'07, we can see that every price rally is lower than the previous attempt and every price retracement ends up higher than the previous.  A breakout to the upside then occurs in late Dec'07. 

There are other essential factors to consider when we are trading triangle patterns. The best triangle is formed between one month to not more than three months. The volume should be drying up as the price trades towards the apex of the triangle.  Upon breakout of the triangle pattern, volume should be significantly higher. It will be even more bullish if the price gaps up in the breakout.

In this article we have discussed the 3 types of price patterns known as the triangles.  Breakout of triangles should not be too close to the apex and that it should be accompanied with heavy volume.  The time taken for the triangle pattern to form should be between one month to 3 months typically.




This article first appeared in Smart Investor in 2007. 
DISCLAIMER: The contents in this website are for fun reading and must not be taken as a buy or sell advice. You must do your own analysis on top of my postings. By reading this blog, you agreed that i am not responsible for your trading.