V.16:7 (352-355): Triangles by David Vomund

Triangles by David Vomund Stock prices tend to move in trends. When an existing trend ends, a classic technical pattern known as a triangle often develops. Here's how to make use of this pattern in the stock market.

When an existing trend is in the process of ending, there is typically some backing and filling, during which a classic technical pattern referred to as a triangle often develops. There are many variations of this pattern, but here, we will concentrate on two variations: the right triangle and the symmetrical triangle.

THE RIGHT TRIANGLE

The right triangle pattern exhibits a series of narrower price fluctuations. On one side of the fluctuation, the boundary of price action is horizontal. On the other side, prices fluctuate toward the horizontal boundary. An ascending triangle is a right triangle with a horizontal top and an ascending bottom. A descending triangle is the reverse.

To illustrate, let's look at Smith International [SII] in Figure 1. Early in 1997, SII began to form an ascending triangle. The resistance† level was at $49 and the stock sold off every time it reached this point, yet each selloff was smaller than the previous one. Now, remember that a trendline is drawn at the extremes of a pattern. For each trendline, at least two price points must be connected before the stock breaks out. In early May, SII was able to clear that resistance hurdle, which was the buy point.