23 October 2008

Triangle Chart Patterns

Particle Man by They Might Be Giants, of course. But to hell with Particle Man; this video is posted here for Triangle Man's appearance in the second verse.

An anonymous reader dug up my skeptical post on triangle continuation chart patterns and asked me if I had noticed that another triangle pattern had appeared on the chart of the Dow.

Indeed, I had noticed the patterns. And how just today, both the Dow and the S&P 500 charts showed the triangle patterns violated to the downside (click the image for large and legible annotated charts):

So what do triangle chart patterns tell us?

Investopedia offers up a clear explanation, with the key info in bold:

Continuation patterns, triangles in particular, are not very reliable. Here's what Stuart Evens has to say:

Look at most any book on the subject of technical analysis, and you'll come across triangles. These formations are usually one of the first chart patterns that novice technicians study, and it deserves some examination. Triangles are classified as reversal patterns in some reference works, while they are described as continuation patterns in others. Robert Edwards and John Magee, in their "Technical Analysis Of Stock Trends", have a chapter titled "Important Reversal Patterns - The Triangles".

John Murphy, on the other hand, in his "Technical Analysis Of The Futures Markets", has triangles as a subheading under the chapter titled "Continuation Patterns".

Both works, however, instruct the reader about triangles behaving as both reversal and continuation patterns. What is common to both discussions, and in fact most discussions on triangles, is that once triangles are properly identified, subsequent price action tends to react in predictable ways. What technicians have found over the years is that after prices break out of the triangle pattern, it is highly probable that prices will continue moving in that direction. Knowing this gives us the opportunity to trade in that direction, and to profit if we are correct.

Trader Mike and Bespoke Investment Group noted the triangle patterns on their respective blogs.

Trader Mike is seeing bullish signs from the technical analysis tea leaves, contrary to my rudimentary analysis, and contrary to Investopedia:

As I see it the ball's now in the bulls' court. They need to break through resistance and start making some higher highs. Breaking the top of all the triangles on strong volume would be a good start.

He thought the S&P 500's violation of the lower side of the triangle was a head fake, and ignored the Dow's violation of the lower side of its triangle by focusing on support levels at 8500.

Afraid to Trade is also all over the S&P 500 triangle chart formation. You should read his entire post with multiple charts, but the gist of his reading of the situation is:

we probably have one more mini-wave up before the triangle breaks to the downside, testing the prior 850 level at a minimum and exceeding it possibly.

As much as I and my positions would benefit from the realization of Trader Mike's bullish perspective, my read on today's triangle pattern breakdown is negative.

And that's only if you believe that these chart patterns are predictive.

No comments: