(Oilfield Svcs./Equipment, NYSE, BH1)
-241
2
Brinker International (Restaurant, NYSE, EAT)
3
-15Nov 92
Dec
Jan 93
Feb
Mar
Apr 92
Dec
|an 93
Feb
Mar
Apr
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Figure 38.3 Two views of an incorrectly identified ascending triangle. What lookslike an ascending triangle on the left clearly is not on the right. The three downward spikes in December, identified by the numbers near the top of the figure,mark a head-and-shoulders bottom with a horizontal neckline, not a triangle.
Figure 38.4 This pattern is not a valid ascending triangle. There are not enoughcrossings between the two trendlines to illustrate a valid triangle construction. Theminor highs and lows are numbered.
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Triangles, Ascending
Tenneco Inc. (Auto Parts (Replac
Tultex Corp. (Apparel, NYSE, TTX)
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Figure 38.5 An excellent example of a correctly constructed ascending triangle.The number of minor highs and lows is good and there are plenty of crossingsfrom the top trendline to the bottom. The volume trend is downward too, until theupside breakout.
Contrast Figure 38.4 with Figure 38.5. In Figure 38.5 notice the numberof times prices move from one side of the triangle to the other. Even thoughprices do not rise very far before throwing back to the triangle apex and moving down, it is still a nicely formed ascending triangle. Also note the generallydecreasing volume, especially near the breakout.
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Figure 38.6 A classic ascending triangle failucontinue moving down. The numbers show th
volume pattern. The volume trend in thisignore the volume pattern because I stumhave a perfectly valid chart pattern but thecase here. I would not throw out the formtrend, but I would take one additional stepthe breakout. If you wait for the breakout,ties such as this one. You will learn in theascending triangles break out downward.
Focus on Failures
StatisticsFigure 38.5 shows the first failure type: a 5% failure. Strictly speaking this isnot a 5% failure (because prices climb by 6%), but it is typical of what onelooks like. A 5% failure is when prices break out and move less than 5% higherbefore curling around and moving below the formation low. In this case, pricesleave the formation at 6*4 and reach a high of 6'/2—a 6% move, far enoughaway for the chart pattern to be a success. For ascending triangles, 5% failuresare rare, occurring just 2% of the time.Figure 38.6 shows the more common failure type when prices break outdownward and continue moving down. I have numbered the minor highs andlows to help with identification. The top trendline is horizontal and the bottomone slopes up. As you run through the identification characteristics in Table38.1, there is only one thing that looks odd with this ascending triangle: the
Table 38.2 shows the general statistics for asascending triangles than I expected in the 5less than two each over the 5-year period. Setriangles, whereas many others have none. Sined allows their statistical performance to(529) of ascending triangles act as consolidother 196 are reversals.Do ascending triangles ascend? Yes. Mhave a meaningful rise after an upside brebreakout (a dose above the horizontal trendlinicantly. Even if an investor buys on a premat
520
Triangles, AscendingTable 38.2General Statistics for Ascending Triangles
DescriptionNumber of formations in 500 stocks from 1991to 1996Reversal or consolidationFailure rate
Statistic725196 reversals, 529 consolidations230 or 32%
Failure rate if waited for upside breakout(5% failure)
13 or 2%
Average rise of successful formations
44%
Average decline of failed formations
21%
Most likely rise
20%
Breakout distance to apex
63%
40
50
Percentage Ca
Of those succeeding, number meeting orexceeding price target (measure rule)
439 or 89%
Start to breakout
2 months (64 days)
Figure 38.7 Frequency distribution of gainslikely gain is 20%, but the rightmost column s
of making a successful trade rises from 68% to 85%. Just 2% of the upside breakouts curl around before soaring less than 5% (the 5% failure rate). The implications of this are obvious: Wait for an upside breakout from an ascending trianglebefore buying the stock.
Those triangles that perform as expected show an average rise of 44%,whereas those that fail tumble by an average of 21 %. I did a frequency distribution of the gains to better judge what the gain would be for a typical stock.Figure 38.7 shows that most of the gains occur in the 11% to 20% range.Almost half the formations (49%) have gains less than 30%. The large columnon the right pulls the average upward.
I plotted the average price rise versus the distance to the apex. I wanted toverify the claim that the most powerful breakouts occur two-thirds of the way
to the triangle apex. Figure 38.8 shows the results. The chart resembles a bellshaped curve tilted on its side, suggesting that the further away from the average breakout of 63%, the weaker the breakout becomes.One surprise with ascending triangles is the high number that meet themeasure rule (89%). I discuss the measure rule further in Trading Tactics butit describes a way to predict the minimum price move. You simply computethe height of the triangle at the start of the formation and add the result tothe price level of the horizontal trendline. The result is the expected minimum price rise. Almost 9 out of 10 ascending triangles hit their price targets.However, the 89% value is misleading. The average height of the formationsin the database is just 10% of the stock price. This means the predicted pricetarget is only 10% higher than the breakout price, so it is relatively easy to
400
Price Rise
Figure 38.8 Scatter diagram of average pricmost powerful breakouts occur two-thirds of
522
Triangles, Ascending
meet the target. Perhaps the biggest surprise of all is that the 89% figure isAnother unexpected discovery is the relatively high number of prematurebreakouts, shown in Table 38.3. One of every four formations has either a premature upside or downside breakout (or both). There are slightly more premature upside breakouts (22%) than downside ones (12%). The volume isabove average, at 175% and 106% of the 25-day volume moving average ofupside and downside premature breakouts, respectively. The above averagevolume makes a premature breakout look just like a genuine breakout and theyoccur about the same distance from the apex as normal breakouts (60% and63%, respectively). I noticed a tendency for a premature breakout to echo onthe other side of the formation with another premature breakout. Just over athird (36%) of the formations that have premature breakouts have both up and
conclusion I reached after reviewing the statiseral others not included. Premature breakoutdirection or success or failure of the formation.Putting premature breakouts aside, whBoth upside and downside breakouts occurapex, 63% and 68%, respectively (Table 38upside breakout result in failure (a 5% failcent of the downside breakouts move down bsoar upward. The overall result means thabreakout, it will continue up. If it has a dowtinue down.Almost two out of three times (62%) anupward and 33% of the time it will breakou
down premature breakouts.
not as good as other formations, but there ar
Do premature breakouts predict the direction of the genuine breakout? Ifyou exclude horizontal breakouts, premature upside breakouts occur with genuine upside ones 40% of the time, and downside breakouts 46% of the time.
record as we see in Trading Tactics.Throwbacks occur when prices break othe formation. Fullbacks are similar except thprices rise back to the up-sloping trendline. Twith upward breakouts are more prevalent thawith downward breakouts.The statistics reveal that, on average, thin about 2 weeks (15 and 13 days, respectivelgenerally start returning to the triangle befomations, prices reach the ultimate high in 6 mfrequency distribution of the time between
not higher.
Likewise, downside premature breakouts pair with genuine upside and downside breakouts 42% of the time.
What does all this mean? Nothing. When you have a premature breakout, either up or down, the final breakout can still go either way. That is the
Table 38.3
Premature Breakout Statistics for Ascending TrianglesDescription
Statistic
Number of premature breakouts (up or down)
184 or 25%
Table 38.4
Number of premature upside breakouts
163 or 22%
Breakout Statistics for Asce
Number of premature downside breakouts
88 or 12%
Volume at upside premature breakout as percentage of25-day moving average
175%
Volume at downside premature breakout as percentageof 25-day moving average
106%
Downside breakout but success
Upside premature breakout distance to apex
60%
Upside breakout
Downside premature breakout distance to apex
63%
Downside breakout
Number of upside and downside premature breakouts
67 or 36%
Horizontal breakout
Premature breakout up, genuine breakout up
65 or 40%
Throwback
Description
Upside breakout distance to apexDownside breakout distance to apex
Premature breakout up, genuine breakout down
75 or 46%
Fullback
Premature breakout down, genuine breakout up
37 or 42%
Average time to throwback completion
Premature breakout down, genuine breakout down
37 or 42%
Average time to pullback completion
Note; Premature breakouts are indistinguishable from real breakouts and offer no clue asto the direction of the genuine breakout.
For successful formations, days to ultimate high
Note: If the formation breaks out upward, it continue
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Triangles, Ascending
mate high is somewhat puzzling. The majority of stocks (224 or 45%) take lessthan 3 months to reach their ultimate high followed by 96 (or 19%) for intermediate-term moves and 35% (175) for durations over 6 months. Although Iconsider an ascending triangle to have short-term investment implications, astock could have a price move lasting much longer.Table 38.5 outlines a study of volume for ascending triangles. Using linear regression, I examined the volume characteristics from formation start tothe day before the breakout. In 68% of the cases, the volume trends downwardover the period. Linear regression is a fancy way of computing a line that bestfits the points such that the distance from each point to the line is minimal.Specifically, I used the slope of the linear regression line to determine the volume trend.Table 38.5 shows a comparison of the average breakout volume with the
Trading Tactics
Now that you can identify ascending triangldo you trade them? Before I give an exampltics and the measure rule (see Table 38.6).
The shape of the ascending triangle sugg
that the Any after an upside breakout is the highest volume day (176% or 76%
If you compute the height of the formationthe horizontal trendline, the result is the mcalled the measure rule.An example makes the calculation clearure 38.9. Calculate the height of the formatthe sloping trendline) from the high (175/s deat the formation start. The difference is 3high—the value of the horizontal trendline—Prices reach the target on July 16, 1992, whabout 6 weeks after the upside breakout.
above the moving average). It suggests that once people discover an upsidebreakout, they buy the stock, forcing the volume to spike the day after the
of the formation (the top left corner) paralle
25-day moving average of the volume ending the day before the breakout (I did
not want the actual breakout volume influencing the moving average). Notice
A more visual and conservative approa
breakout. From that point on, volume recedes but is still comparatively high aweek later.
value of the line the day prices break out of
Some analysts say throwbacks are more likely after a low volume breakout. I checked this and found that it is not true. A throwback occurs after a highvolume breakout 54% of the time and after a low volume breakout 46% of the
Table 38.6Trading Tactics for Ascen
time. It is more accurate to say that a throwback is more likely to occur after a
Trading Tactic
Explanation
high volume breakout.
Measure rule
Compute the heightriangle. Add the rtrendline. The sum
Wait for confirmation
Buy the stock the dabove the top trendfor a throwback thebreakout direction
Sell on measure rule
For short-term tradprice (see measuretrendline. For interthe stock until fund
Sell on downside breakout
If you own the stocyou do not own it,back, that is anothto your short posit
Short sales
If you short the stocyou have a one indownward. Cover tupward.
Do high volume breakouts push prices higher? Not really. When the
breakout volume is over 50% above average, prices rise by 42%. When thebreakout volume is less than 50% below the 2 5-day moving average, a 43 % riseresults.
Table 38.5
Volume Statistics for Ascending TrianglesDescription
Statistic
Number showing downward volume trend
495 or 68%
Volume for breakout day and next 5 days compared with25-day moving average
130%, 176%, 151%,144%, 128%, 121%
Percentage of throwbacks after high volume breakout versuslow volume breakouts
54% versus 46%
Performance of high volume breakouts versus low volumebreakouts
42% versus 43%
Note; The trend of volume is downward until the breakout day when it spikes upward.
Note: Buy the stock after a confirmed breakout (theand sell when it nears the target price.
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Triangles, Ascending
Sample Trade
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Sample Trade
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Figure 38.9
Mar
Apr
May
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jul
Aug
Sep
Measure rule applied to ascending triangles. There are two ways to
predict the price move of an ascending triangle. Compute the formation height by
Dan is an investor with a few years of experience. He is new to technical analysis and discovered ascending triangles by accident. After doing some researchto familiarize himself with the formation, he found that if he delayed buying astock until after a breakout, he would increase his chances of success. However,he would also give up part of his gains as the fastest portion of the rise occursat the start. That was a trade-off he was willing to make.Dan took an interest in the company shown in Figure 38.10 when henoticed an ascending triangle forming in the stock. He believed that the breakout was nearly at hand when volume suddenly sank to 2 3,400 shares on August19. Two days later, on higher volume, prices crossed the triangle and peakedout the top. For the next few days, prices balanced themselves on the top horizontal trendline and waited for demand to send them higher. The decisivebreakout occurred on August 26, even though volume was tepid. Dan grabbedhis calculator and computed the breakout distance to the apex and discoveredthat the breakout occurred at the 70% mark. This signaled a potentially strongbreakout.
subtracting the low from the high at the start of the formation (denoted by thetwo circles). Add the result to the price marked by the top trendline. The combination is the price to which the stock will climb, at a minimum. Alternatively, drawa line parallel to the up-sloping trendline beginning with the left top corner of theformation. At the point where prices break out of the formation, the price level ofthe line becomes the target price.
Fastenal Company (Retail Building Supply, NASDAQ, FAST)
price. The figure shows the new line. Be careful when determining where theformation begins since tagging the beginning of the formation too soon willcause an abnormally high price target.Since a third of the formations break out downward, you must wait for anupside breakout before investing. Once prices close above the top trendline,buy the stock. Although you will be buying at a higher price, the chances of
having a failure are small (2% versus 32% if you do not wait).Once prices rise, use the measure rule to estimate gains. Since die measure rule is not perfect, be ready to take profits once prices near the target. Usepast resistance zones to fine-tune the prediction.If prices break out of the triangle downward, then sell your holdings
immediately. This is also a time to go short. Look for prices to drop up to 20%.If a pullback occurs, wait for prices to resume their downward direction thenadd to your short position. Close out the trade if the fundamentals improve orif prices pause at a support zone.
|un94
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Figure 38.10 Trading an ascending triangle. Dan bought 500 shares of the stockat point 1 after the stock threw back to the formation. He sold it at point 2, the dayafter the stock hit the price target of 221/2. Note the down-sloping volume trendduring creation of the formation and the two support lines parallel to the two triangle borders.
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Triangles, Ascending
39
However, volume told a different story. Although volume had beensteadily receding throughout the formation as one would expect, there was notenthusiastic volume on the breakout. With this stealthy signal, Dan decided towait before buying the stock.Believing that a profitable opportunity was at hand, he computed the target price to see if it afforded a profitable move. At the formation start, the horizontal trendline marked the high for the stock at 19i4. At the same point, the
up-sloping trendline marked the low. At the start of the formation, the lower
Triangles, De
trendline was at 163/8. This predicted nearly a three-point climb, or a 15%
move from the 19'/4 launch price. To Dan, the small move was not terriblyexciting, but it was much better than the interest rates the banks were paying.
Two days after the breakout, the stock started declining and returned tothe top of the formation. That is when Dan pulled the trigger and bought 500shares at the high for the day, 19l/2 on September 2, 1994. Immediately, heplaced a stop-loss order to sell the stock should it decline below the lowest lowof the formation. The formation low occurred on July 25, 1994, at a price of163/4. He told his broker to sell the stock I/B below this, or 165/g. That wouldlimit his loss to a steep 15%, but it was also slightly below the nearest supportlevel (the bottom of which was also at 163/4). He reasoned that there was adecent chance that if the stock declined, growing demand would repulse pricesand not trigger his stop.Then he waited and watched the stock. It peaked at 21 '/4 on September 26before leveling off and heading back down. Since the stock was not near theprice target of 22 H, Dan decided to hold on. The stock continued sinking
R E S U L T S SNAPSHOTAppearance
Triangle shape wsloping top
Reversal or consolidation
Short-term (up
until it found support at the horizontal triangle trendline at 19 on October 5.At that point, the stock started moving up again. On Halloween, the stockreached his price target by hitting a daily high of 23. He decided to sell thestock the next day and received a fill at 22l/2.Dan evaluated his results and reviewed the trade. He had a net gain of$1,450 or almost $3 a share. That is a 15% gain in 2 months or almost a doubling of his money if he kept up the performance for the entire year. He also
Failure rate
45%
Failure rate if waited fordownside breakout
4%
decided that he was lucky as he sold near the top. When the stock returned tothe support level in early October, it could have continued down. He decided
that once a stock rises by 10%, he should raise his sell stop to break-even eventhough, in this case, it would have cashed him out prematurely.
Average decline
19%, with most
Average volume trend
Downward
Premature breakout
22%
Breakout distanceto apex
69%
Fullbacks
64%
Percentage meetingpredicted price target
67%
See also
Head-and-Shou
The Results Snapshot shows performance refailure rate at 45% is well above the 20% cever, if you wait for a downside breakout, th
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Triangles, Descending
Identification Guidelines
The average decline, at 19%, is about what you would expect from a bearish
formation. The most likely decline, at 10% to 20%, is evenly distributed acrossthe range. Premature breakouts occur in nearly a quarter of the formations
(22%), so that is something to watch out for.
531
should it fall to 73/8. After reaching a minor high at 83/s on October 11, thestock begins declining for a few days. It descends and reaches the buy price 2days later. Your broker buys the stock.You are not alone. Other investors, believing the stock is retesting the lowthat occurred a week earlier, also buy the stock. Together, the buying puts amomentary floor on the stock. For the next 2 days, the stock returns to the 73/s
Tour
level before buying demand pushes the price higher. This time the stock doesnot climb as high as the prior minor high; it only reaches a value of 8:/8 before
Figure 39.1 shows a descending triangle that is typical in many respects. Pricesrise to meet a down-sloping trendline on the top of the pattern and fall back.Then, they rebound off a horizontal trendline along the base of the formation.The volume pattern is unusual for a descending triangle. Normally, volumerecedes as the breakout approaches, but this one appears to have a V-shaped
trend—higher at the beginning and end and weaker in the center. The breakout is downward and occurs on low volume. A bearish breakout can have highor low volume but volume is usually heavy. After the breakout, prices pull backto the triangle boundary before continuing down.Why do descending triangles form? The descending triangle shown inFigure 39.1 begins forming in October 1994 as part of a consolidation in a
turning down. Again, when the stock reaches a low of 73/8, buying demand
increases enough to halt the decline at that level and to send the stock movingback up. During the next 2 weeks or so, you and other investors buy the stock.Enthusiasm for the stock quickly wanes and a series of lower highs outline adown-sloping trend. The floor, at 7%, becomes the horizontal support level.
Eventually, investors buy enough of the stock and have either run out ofmoney to buy more or decide they already own enough. The stock slips belowthe support line on November 9, and closes at the low for the day at 7l/s. Thestock hovers near that price for a few more days before continuing down inearnest on higher volume.
downward trend. Imagine you believe the fair value of this stock is 73/s but is
Quick-footed investors, realizing that the floor is no longer holding firm,sell the stock. The price begins declining rapidly now but soon levels off. For
overvalued at prices much above that. You tell your broker to buy the stock
a few days, selling pressure meets buying demand and the decline halts, turns
around, and begins moving up. It nears the base of the triangle and the smartFllene's Basement Corp (Retail (Special Lines), NASDAQ, BSMT)
money quickly disposes of any remaining shares in their portfolios. The pullback completes and the stock rounds over and starts heading down again. In 3
months' time the stock reaches the ultimate low of just under 3 before levelingout. That is a decline of 60%.
Identification GuidelinesDescending triangles have distinctive chart patterns making them easy to identify. Consider the triangles shown in Figure 39.2. A descending triangle appearsduring March and April 1993 and marks the end of a long rise started in late1992. On above average volume, the stock moves up in early March thenquickly rounds over and heads down. It declines to a low of about 29'/2 where it
finds support. Prices bounce back up again, not carrying as high this time, thenreturn to the support level. As April dawns, the stock bounces one last timebefore falling through the support line and heading down on high volume.
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Figure 39.1 A nicely formed descending triangle with unusual volume pattern.Typically, volume trends downward and is quite low just before the breakout. Alsoshown is a pullback, repulsed by the horizontal resistance level.
Like a ball bouncing along the floor, each bounce from the support lineis less high than the previous bounce, giving the formation a down-slopingappearance along the top. The support region at 29'/2 is flat. These two ingredients, a down sloping trendline on the top and a horizontal support line on thebottom, are the two main characteristics of descending triangles. A recedingvolume pattern throughout the formation rounds out the picture.
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Triangles, Descending
Table 39.1Identification Characteristics of
Figure 39.2 Two descending triangles. The March triangle forms after a longclimb beginning in late 1992. The nicely formed chart pattern has a receding volume trend especially in the latter half of the formation. The July formation is a failure since it does not immediately descend as expected. Nearly half of descendingtriangles break out upward.
The July formation is also a descending triangle although not as wellformed. The volume pattern rises through the first half of the formation beforemoving downward toward the triangle apex. Prices momentarily move downout of the formation on August 3 and stay below the horizontal support line for
2 more days. Then, prices start rising. They sail up through the base of the formation and shoot out the top, reaching a peak of 30'/s in late August. Pricesstart moving down, slowly at first, then plunge down on exceedingly high vol-
ume. The stock declines to a low of 23 u /ie on December 21, 1993, a decline ofabout 15%. Using the same ultimate low point, the first triangle shows adecline of almost 20% from its horizontal support line.I am sure that if you owned stock in this company and sold during eitherof the descending triangles, you would be pleased. Although the second formation is a failure because it rises above the triangle top, prices do start down
within the month. Sometimes failed formations prematurely alert you to atrend change, as the July example shows.Table 39.1 outlines the identification characteristics for descending triangles. The triangular-shaped appearance makes the descending triangle easyto identify. Prices rebound from the base of the formation following a horizontal trendline, whereas prices along the top obey a downward-sloping trend.Volume throughout the formation also follows a downward trend especially as
Characteristic
Discussion
Triangle shape
A triangular-shathe bottom onedown, that inter
Horizontal bottom support line
A horizontal (or nPrices should tominor lows thattrendline).
Down-sloping top trendline
A down-slopingthe horizontal baup and touch (oat least twice, fo
Volume
Volume recedesbreakout.
Premature breakouts
Are rare but occlike genuine bre
Downside breakouts
Usually occur ontime. However, p
Price action after breakout
Prices usually mlow in a straighttwo-thirds of the
it nears the breakout day. Volume on that dapared to the prior day. After a breakout, priquickly and reach their ultimate low rapidlytriangle is short to intermediate term, priceSupport and resistance appear along tthe top of the formation usually stop at thebacks to the bottom halt at the horizontal toften follow the sloping trendline down. D
descending triangle, prices rise to meet thethen pause. Sometimes it takes several trieshorizontal resistance line.
Triangles, as a group, are easy to spot. Hthat dictate a careful approach. Figure 39.3
of what looks like a descending triangle, butconform to the usual pattern for a descendias the breakout nears. In Figure 39.3 volumof the triangle, then tapers off at the top wvolume climbs as prices descend then shooComparing the volume at the start and endthe trend—although somewhat downwardmore of a bowl shape.
534
Triangles, Descending
Bane One Corp (Bank, NY
Crompton and Knowles Co. (Chemical (Specialty), NYSE, CNK)
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May
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Oct
Nov
Figure 39.3 An invalid descending triangle. There is only one minor high leavingtoo much white space in the center of the formation. Prices should cross from sideto side several times forming at least two minor highs and lows.
Oct 92
Figure 39.4 A descending triangle failure. Sinsolidations of the trend, this one breaks out up
upward. If you bought the stock the day afteVolume for many formations is not a crucial factor, and you should not
attach too much significance to it. However, a volume pattern that is not characteristic for a chart pattern raises a warning flag. Coupled with other factors,it might cause you to bypass the stock and look elsewhere for a more promising situation.The price picture is even worse. Only one minor high composes theentire triangle. Well-formed descending triangles have prices that cross from
side to side several times. There is no massive amount of white space in thecenter of the triangle. Contrast Figure 39.3 with Figure 39.1.
Focus on FailuresA 45% failure rate is shameful, but that is what descending triangles have. Figure 39.4 shows an example of a failure. Perhaps the first thing you notice is thatprices rise; they shoot out the top of the triangle. Why? I can only speculate ananswer to the question but Figure 39.4 does provide some clues. First, the triangle appears in a rising price trend. In almost two out of three cases, pricescontinue in the direction of the existing trend. In this case, that trend is upward.Figure 39.4 shows a premature upside breakout in the beginning of February. It may sound silly, but that is a strong clue that prices will continue
the veracity of that comment. A day later, pristop at the top trendline. Prices continue dtrendline before resuming their uphill trendStill, waiting for a downside breakout bexisting holding is always a wise course wityou sold your holdings once you recognized
triangle. You would have missed out 011 the
The volume pattern for this formationrise, so does volume; as prices descend, voluthe volume data through a linear regression
slope of the resulting line tilts downward. Inas in a well-behaved descending triangle.
Statistics
Table 39.2 shows general statistics for dedescending triangles appear in the databaAlmost two out of three (422 out of 689)