Forex Strategies Resources

6# Ascending Triangle (Continuation Pattern)

Ascending Triangle
Ascending Triangle

Ascending and descending triangles are also referred to as "right-angle" triangles.Generally, a triangle pattern is considered to be a continuation or consolidation pattern. Sometimes, however, the formation marks a reversal of a trend.Symmetrical triangles are generally considered neutral, ascending triangles are bullish, and descending triangles are bearish

 

Ascending and descending triangles are also referred to as "right-angle" triangles.Generally, a triangle pattern is considered to be a continuation or consolidation pattern. Sometimes, however, the formation marks a reversal of a trend.Symmetrical triangles are generally considered neutral, ascending triangles are bullish, and descending triangles are bearish.

What does an ascending triangle look like?

Converging trendlines of support and resistance give all three patterns their distinctive shape. Buyers and sellers find themselves in a period where they are not sure where the market is headed. Their uncertainty is marked by their actions of buying and selling sooner, making the pattern look like an increasingly tight coil moving across the chart. As the range between the peaks and troughs marking the progression of price narrows, the trendlines meet at the "apex," located at the right of the chart. The "base" of the triangle is the vertical line at the left of the chart which measures the vertical height of the pattern.

An ascending triangle - the "flat-top" triangle - also shows two converging trendlines. In this case, however, the lower trendline is rising and the upper trendline is horizontal. This pattern occurs because the lows are moving increasingly higher but the highs are maintaining a constant price level.

What are the details that I should pay attention to in an ascending triangle pattern?

1. Occurrence of a Breakout - Technical analysts pay close attention to how long the triangle takes to develop to its apex.

The general rule, as explained by Murphy, is that price breakout clearly penetrate one of the trendlines – somewhere between three-quarters and two-thirds of the horizontal width of the formation. The breakout, in other words, should occur well before the pattern reaches the apex of the triangle. To take the measurement, begin by drawing the two converging trendlines. Measure the length of the triangle from its base to the apex. Next, plot the distance along the horizontal width of

the pattern where the breakout should take place. If prices remain within the trendlines beyond the three-quarters point of the triangle, technical analysts will approach the triangle with caution.

 

2. Price Action - With its "flat-topped" shape, the ascending triangle indicates that buyers are more aggressive than sellers. The ascending triangle forms because of a supply of shares available at a fixed price. When the supply depletes, the shares quickly breakout from the flat-topped trendline and move higher.

3. Measuring the Triangle - To project the minimum short-term price objective of a triangle, an investor must wait until the price has broken through the trendline. When the price breaks through the trendline, the investor then knows whether the pattern is a consolidation or a reversal formation. To calculate the minimum price objective, calculate the "height" of the formation at its widest part - the "base" of the triangle. The height is determined by projecting a vertical line from the first point of contact with the trendline on the left of the chart to the next point of contact with the opposite trendline. In other words, measure from the highest high point on one trendline to the lowest low point on the opposite trendline. Both these points will be located on the far left of the formation. Next, locate the "apex" of the triangle (the point where the trendlines converge). Take the result of the measurement of the height of the triangle and add it to the price marked by the apex of the triangle if an upside breakout occurs, or subtract it from the apex price if the triangle experiences a downside breakout.

4. Duration of the Triangle - As mentioned before, the triangle is a relatively short-term pattern. It may take up to one month to form and it usually forms in less than three months.

5. Forecasting Implications - The ascending triangle is considered to be bullish. Typically, that breakout should be accompanied by a noticeable surge in volume.

6. Shape of Ascending Triangle - Prices should rise to hit the upper trendline at least twice (two highs), then fall away. Prices should fall to the lower trendline at least twice (two lows), then rise. The horizontal top trendline need not be completely horizontal but it often is and, in any event, it should be close to horizontal.

7. Volume - Murphy advises that in the ascending triangle, volume tends to be slightly higher on bounces and lighter on dips.

8. Premature or False Breakouts - Because the pattern can be either a reversal or continuation pattern, investors are particularly susceptible to false moves or, at the very least, confused by them. In addition, because volume becomes so thin as the triangle formation progresses to the apex, it takes very little activity to bring about an erratic and false movement in price, taking the price outside of the trendlines. To avoid taking an inadvisable position in a stock, some investors advise waiting a few days to determine whether the breakout is a valid one. Typically, a false move corrects itself within a week or so. The pattern immediately will be suspicious without an accompanying high volume breakout. If there's no pick up in volume around the breakout, investors should be wary.

Ascending triangle is rally to a new high followed by a pull back to an intermediate support level, 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.

The technical target is derived by measuring the vertical height of the triangle and applying this length to the new breakout level.

• Ascending triangles are among the most reliable of all technical patterns because both supply and demand are easily defined.

• The defining characteristic of ascending triangles is the pattern of rising lows and a series of equal highs. This combination of points can be connected to form a right angle triangle. If a stock violates any part of the triangle during its formation the pattern it should be considered void and trading positions should be abandoned.

• Triangles are about indecision and as such volume should slow noticeably as the pattern is being constructed. It is most important that volume surge as the stock rallies through the reaction high. This tells the technical trader that supply has been absorbed, short covering is rampant and the next leg of the bull phase is about to begin.

• Upside breakouts often lead to small 2-3% rallies followed by an immediate test of the breakout level. If the stock closes below this level (now support) for any reason the pattern becomes invalid.

This pattern typically occur after a stock has had a strong move higher due to a positive fundamental development. Investors come to believe that much higher stock prices are justified given the improved fundamental outlook but a large portion of investors that were smart enough to have bought the stock at much lower prices disagree. These "smart money" investors consider the extreme optimism as little more than an opportunity to liquidate positions. Using fundamental metrics, they set a price to sell their large blocks of stock and wait. In effect, they are beginning a distribution process based on their interpretation of fair value. The first step in the distribution process occurs after one particularly bullish fundamental development. The stock surges to a new high and Wall Street analysts begin pounding the table with new "buy" recommendations.

The increased volume is a perfect opportunity for the smart money to liquidate positions. They begin selling and the rally is stopped in its tracks creating a small top (top #1). As buyers realize that there is plenty of supply at this level prices begin to falter and in short order the stock trades back to a previous intermediate term support level. Because this low is the reaction to the previous rally to new highs, it is often called the reaction low. In this very limited sense, ascending triangles are very much like double and triple tops -- rising demand meets entrenched supply. In fact, because the fundamental news is so strong Wall Street analysts dismiss the weakness as simple profit taking and a new rally soon begins.

On strong volume the stock surges toward the recent high where it is once again rebuffed by aggressive sellers (top #2). It is at this point that speculators recognize a trend and they begin adding new short positions just beneath the recent high. This added selling pressure should push the stock significantly lower but bullish enthusiasm is rampant. The stock does move lower but the pull back is subdued, in fact, the stock does not reach the reaction low set in the aftermath of the first move to new highs.

Days later another positive development occurs and the stock begins moving toward the recent high on very strong volume. Speculators step-up and add to their short positions but the supply of stock from smart money investors is being satiated. It soon becomes clear that buyers are going to win this battle because sellers are running out of stock to sell. As the stock pierces what had been strong resistance a strange dynamic occurs, those traders that had been selling the stock short at the recent high are motivated to cover short positions to cut losses -- thereby creating increased demand for the stock at a time when supply has been severely curtailed. Against this backdrop ongoing bullish enthusiasm leads to a spectacular price breakout on strong volume. Very soon after the breakout several fundamental analysts make positive comments, aggravating the imbalance between supply and demand. Weeks later the stock surges to a substantial new high. In this rareinstance smart money investors are trumped by ongoing bullish fervor and the level that had been resistance becomes important support.

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