2 or 1 5%
Upside premature breakout distance to apex
0
72%
Downside premature breakout distance to apex
71%
72%
161% of 25-day
Of formations showing premature breakouts,number having both upside and downside
60
65
70
75Distance to Apex (%)
H Upside Breakoutss
O Downside Breakouts
Figure 40.7 Frequency distribution of breakouts as a percentage of the distanceto the apex. Most breakouts occur about 75% to 80% of the way to the triangleapex.
plate. Most breakouts occur 75% to 80% of the way to the apex. The goodnews about this is that it gives you a longer opportunity to trade the triangleinternally: Buy or sell at die trendlines then take the opposite position as pricescross to the other side without worrying about a breakout until the apex nears.Table 40.3 highlights statistics for symmetrical triangles with prematurebreakouts. Comparatively few symmetrical triangles have premature breakouts(16%) for both breakout directions. A premature breakout is when prices doseoutside the trendline boundary but quickly return to the triangle formationbefore reaching the apex. The table shows the different types of prematurebreakouts along with a comparison of breakout volume. Volume is above average, making premature breakouts indistinguishable from genuine breakouts.
out price within a third of the yearly low. Mapping performance over theyearly price range, we find the best performing triangles with upside breakouts
happen in die upper diird of die range. Downside breakouts perform best fromthe center third of the yearly range. The sample sizes are small, especially forthe high category in upside breakouts (five samples), so interpret die numberscautiously.The last statistics table (Table 40.5) concerns volume. The vast majority
of formations (73% and 82%) have receding volume trends as measured by dieslope of a line plotted using linear regression. Since the volume trend recedesand can become very low just before the breakout, I compared the breakout
day volume with the prior day. Once a breakout occurs, die volume shootsTable 40.4Breakout Statistics for Symmetrical Triangle Bottoms
However, premature breakouts do break out slightly sooner (71% versus 79%
Description
Upside Breakout
Downside Breakout
and 72% versus 74%).
Throwbacks/pullbacks
27 or 43%
47 or 57%
Average time to throwback/pullback completion
12 days
11 days
For successful formations, days toultimate high/low
5.5 months (163 days)
2.5 months (74 days)
high after an upside breakout and less than half that time to reach die ultimate
(C), or high (H)
L42%, C48%, H10%
L51%, C27%, H22%
low after a downside breakout. Most of the upside breakouts (48%) occur indie center third of die yearly price range. Downside breakouts have die break-
Percentage gain/loss for each12-month lookback period
L42%, C37%, H67%
LI 8%, C23%, H16%
Table 40.4 shows statistics related to genuine breakouts. About half theformations have either throwbacks (43%) or pullbacks (57%) to the trendline
or triangle apex. These complete in less than 2 weeks (12 and 11 days) andnone takes more than a month to loop around. Anything longer than a monthI consider to be normal price action and not a throwback or pullback.
Once a breakout occurs, it takes about 5 V2 months to reach the ultimate
Percentage of breakouts occurringnear 12-month low (L), center
556
Triangles, Symmetrical Bottoms
Table 40.6
Trading Tactics for Symmetrical Triangle BottomsTable 40.5Volume Statistics for Symmetrical Triangle BottomsDescription
Upside Breakout
Number showing downward volumetrend
46 or 73%
68 or 82%
1 69%, 1 72%, 1 42%,127%, 110%, 122%
245%, 250%, 218%,162%, 147%, 145%
Volume for breakout day and next5 days compared with day beforebreakout
Trading Tactic
Explanation
Measure rule
Compute the formation height by subtracting the lowest lowfrom the highest high. For upside breakouts, add the differenceto the highest high or for downside breakouts, subtract thedifference. Alternatively, symmetrical triangles can be halfwaypoints in a move, so project accordingly.
Trade with trend
As consolidations, prices usually leave the triangle in the samedirection as when they enter.
Wait for breakout
Always wait for the breakout in case the triangle reverses.
Intrapattern trade
If the triangle is wide and long enough, sell or go short at thetop trendline and buy or cover at the bottom one. Cover at thebreakout if it goes against you or stop trading once prices nearthe apex.
Downside Breakout
Are low volume breakouts moresubject to throwback/pullback?
No
No
Performance of high volume breakoutsversus low volume breakouts
48% versus 40%
1 8% versus 1 2%
upward for both breakout directions (169% and 245% of the prior day's total).Volume remains high throughout the week.Are low volume breakouts more likely to pull back or throw back? No. Itis just the opposite: High volume breakouts are more likely to throw back orpull back. For upside breakouts, one formation (4%) follows a breakout on vol-
ume 50% below the 25-day moving average, whereas 15 formations (56%)follow breakouts with volume that is 150% of the 25-day moving average.Downside breakouts show a similar trend with 4 or 9% appearing after a lowvolume breakout and 12 or 26% appearing after a high volume breakout. Asyou can see, the sample size is small but the results follow what we have seenfor other formation types.Do high volume breakouts propel prices farther? I use the same 50%/150% volume benchmark to denote low or high volume and gauge performance for those formations that fall within the two volume categories. In bothdownside and upside breakouts, high volume breakouts result in better performance than those on low volume. However, the differences are not statisticallysignificant, meaning that they could be due to chance (alternatively, they couldbe accurate). Again, the sample size is small.
Varco International, Inc. (Oilfield Svcs./Equipment, NYSE, VRC)- 14
Sep95
Figure 40.8 Measure rule for symmetrical triangle bottoms. Use the measure rule
Trading TacticsTable 40.6 outlines trading tactics. There are two types of measure rules forsymmetrical triangle bottoms. Figure 40.8 shows the first one. Compute theformation height from highest high (point B at 9%) to lowest low (point A at83/s). Either add the difference of !3/8 to point B or subtract it from point A,depending on the breakout direction. In this case, the breakout is upward, sothe target price becomes 11 '/s (that is, 93/4 + l3/s). Prices reach the target in lessthan a month.
to predict the target price. Subtract the low (point A) from the high (point B) and
add the difference to the high (point B). The actual trade results in a gain of 27%in 1 month.
557
558
Triangles, Symmetrical Bottoms
Some symmetrical triangles act like larger versions of pennants. They arehalf-mast formations and mark the halfway point in a move (like a measuredmove up or down formation). Had the triangle broken out downward, it might
have continued down and fulfilled the measure rule. In such a case, the measure from point C (on the left at 1 l7/g) to point A should be subtracted from thevalue of point B. The result is the target price of 6'/4. Point C is the start of themove leading to the triangle and the measure rule applies just as in a measuredmove up or down formation.Use one or both measure rules as appropriate to the situation. The first
method, using the formation height, is the more conservative of the two andmore likely to be fulfilled.
It is difficult or impossible to determine in which direction prices willbreak out. Generally, they continue the prevailing trend. By this I mean pricesexit following the intermediate-term price trend that leads to the formation.Even in Figure 40.8, although the formation acts as a short-term reversal of thedownward trend, the longer-term trend is upward (it is not visible in the fig-
ure). Prices begin rising in early February from a price of 6 and reach a high of1 !7/8—about double—by early September.
Since you cannot reliably determine the breakout direction, it is alwaysbest to wait for a breakout. Occasionally, prices squeeze out the triangle apex
and have no breakout at all. This is a rarity, but it does happen. Once pricesbreak out, trade with the trend: Go long if prices break out upward and shorton downside breakouts.I have noticed that even when prices break out in an adverse direction (a
reversal of the prevailing trend), they quickly reverse again and resume theoriginal trend. This means, for example, in an upward trend they break outdownward and fall by 10% or 15 %, then head back up and finish much higher.
This behavior for reversals is something to watch out for, especially for downside breakouts in a raging bull market.Another way of trading triangles is to buy near the lower trendline andsell near the upper one, then go short. Occasionally, a symmetrical triangle is
wide enough and long enough that you can profitably trade it in this manner,but you have to be nimble. If you are inexperienced, be sure to practice this onpaper before trying it with real money.
Sample TradeCan you make money on symmetrical triangles? Yes. Consider the trade Imade in the stock shown in Figure 40.8. There were a number of factors thatled me to this stock, including a rising rig count, rising oil prices, cold weather,and related political events (OPEC tightening and possible oil boycott againstNigeria). All of these factors suggested the price of oil during the winter
Sample Trade
559
would continue rising and demand for the oil field services industry wouldremain strong.Another factor was that the stock price was riding along the bottom of a
trend channel. The method used to create the trend channel is somewhat complicated but it involves drawing a line using linear regression on the closingprices then plotting two lines parallel to the regression line, each two standarddeviations away. Figure 40.8 shows the upper line of the channel. I did notdraw the lower line, but it intersects point A and is parallel to the top channelline. The trend channel suggests prices would move from one side of the channel to the other.Since the upside breakout was on weak volume, I decided to hold off andwait for a throwback. This was a risky maneuver, but it worked out. On
December 1,1 bought die stock and received a fill at 9'/g.The apex of a symmetrical triangle is often a place of support or resistance. You can see this on the chart. Prices declined to the apex and stayedthere for 3 days. As predicted, the stock took off and climbed after that. Eventhough the stock fulfilled the measure rule, I suspected that it would continuecrossing to the upper channel line. The stock stalled out midway across thechannel, pausing at the linear regression line (not shown, but it is equidistantbetween the top channel line and point A). This is often the case and I wasanticipating such a pause.In about a week, prices started moving up again and quickly made a newhigh. When prices touched the top of the trend channel, I considered sellingbut did not for tax reasons. I decided to hold off until the new year—just 2trading days away. On January 2 I sold the stock and received a fill at 115/s. Thedelay in selling dropped my return from nearly 40% to 27%. Still, that is nota bad return for a hold time of 1 month!
Results Snapshot
41Triangles, Symmetrical Tops
561
Upside BreakoutsAppearance
In a rising price trend, prices form lower highs andhigher lows following two sloping trendlines thateventually intersect. The breakout is upward.
Reversal or consolidation
Short-term (up to 3 months) bullish consolidation
Failure rate
5%
Average rise
37%, with most likely rise being 20%
Volume trend
Downward
Premature breakout
14%
Throwbacks
58%•
Percentage meetingpredicted price target
81%
Synonym
Coils
See also
Head-and-Shoulders Tops; Shark-32; Triangles,Ascending; Triangles, Descending; Triangles,Symmetrical Bottoms
RESULTS SNAPSHOT
Downside BreakoutsAppearance
In a rising price trend, prices form lower highs andhigher lows following two sloping trendlines thateventually intersect. The breakout is downward.
Reversal or consolidation
Short-term (up to 3 months) bearish reversal
Failure rate
6%
Average decline
20%, with most likely decline being 15%
Volume trend
Downward
Premature breakout
19%
Fullbacks
59%
Percentage meetingpredicted price target
62%
Surprising finding
Premature breakouts occur a bit sooner than genuinebreakouts and sometimes on light volume.
Synonyms
Coils
See also
Head-and-Shoulders Tops; Shark-32; Triangles,Ascending; Triangles, Descending; Triangles,Symmetrical Bottoms
SfiO
Those of you familiar with symmetrical triangles might wonder how I separated them into tops and bottoms. I use the price trend leading to the formation. Symmetrical triangle tops have prices that trend up to the formation,whereas bottoms have prices leading down. I separated them by price trend inthe hope that it would allow prediction of the breakout direction. Alas, it didnot. This chapter concerns itself with symmetrical triangle tops.The failure rates for symmetrical triangle tops are low at 6% and 5% forthe two breakout directions. This compares favorably with the maximum 20%rate I consider reliable formations to possess.Downside breakouts shows losses of 20%, about average for bearish formations. Upside breakouts, however, underperform with gains of 37% insteadof the usual 40% for bullish chart patterns. But they are solid performersaccording to the measure rule (81% hit their targets). I consider values above80% to be reliable. Downside breakouts fall short with only 62% meeting orexceeding their price targets.An interesting finding is that premature breakouts occur about 71% to76% of the way to triangle apex (versus 78% to 79% for genuine breakouts)and sometimes on quite light volume.
562
Triangles, Symmetrical Tops
TourFigure 41.1 shows an example of a symmetrical triangle top. Prices rise to thestart of the formation and make a new high. Then prices cross the formationfrom side to side, making lower highs and higher lows. After nearly 2 months,the trends are in place. A down-sloping trendline drawn along the tops connects the minor highs, whereas an up-sloping trendline on the bottom supportsthe minor lows.The volume trend recedes although it is spiky in places. Prices attempt toleave the formation in late June but get sucked back in. They try again and withhigher volume shoot out the top of the triangle but quickly throw back, curlaround, and head lower.Why do symmetrical triangles form? With tops, they usually form near
the yearly high and that poses their first challenge. Prices zoom up makinghigher highs on succeeding days. Eventually, selling pressure quenches
demand for the stock and prices turn down. The momentum players, sensinga change in trend, quickly sell some of their holdings, putting additional pressure on the stock. Prices fall to a level where prior support set up by a peakmonths earlier or various other factors entice investors to view the stock as a
bargain. The price is shooting up, they reason, so why not join the trend especially now that it is at a cheaper price?Such rationalizations increase demand and send the stock up again butthis time the momentum players that missed a chance to sell earlier do so now.
Others, believing that there may not be ethe stock to the old high, sell too. The selllower level and turns it around.Value investors seeing the stock dropnot changed, buy it on the way down. Somprice and others buy it for the first time. T
horizontally for a bit instead of straight dowforms not so much from anxious buyers, b
Throughout the trend, volume is decrbeing traded and it becomes easier for theally, though, a large buy order comes in atop trendline, they may begin to take out thto buy when prices rise above the trendlin
and prices soar on heavy volume.If demand is strong enough, prices cthough, prices spin around and head backback. There prices meet support at the topangle apex. Usually, prices rebound and c
Sometimes, though, prices continue dowtrend (such as that shown in Figure 41.1).
Identification Guidelines
Table 41.1 lists identification guidelines f
Kaufman and Broad (Homebuildlng, NYSE, KBH)
Consider Figure 41.2, a symmetricalbreakout. The overall shape of the formatitrendlines: One slopes downward from th
from the bottom so that they join at the apNumbers mark the minor highs and
each trendline at least twice. That is impotinct individual hills (minor highs) and vall
The volume pattern has a downward
when prices rise and decline when prices faLet me say it is unusual for a symmetricalume trend, but that does not mean it will ntaper off, it may not be noticeable unless y
Apr 95
May
Figure 41.1
Jun
Jul
Aug
Sep
Oct
A symmetrical triangle top. Prices trend up to the formation.
the slope of the resulting line. However,show a receding volume trend, high enoutions carefully.In a historical price series, a prematurside the formation trendlines (either abovewithin a few days. Not only do prices retur
Table 41.1Identification Characteristics of Symmetrical Triangle TopsCharacteristic
Discussion
Shape
A triangular shape forms within the confines of two trendlines,one sloping up and the other down so that they intersect atthe triangle apex. The trendlines need not be the same length.There should be at least two distinct minor highs and twominor lows that touch the trendlines (in other words, at leastfour trend reversals).
Touches
Volume
Usually recedes throughout the formation but can be irregularand is often very low just before the breakout.
Premature breakout
Has at least one close outside the triangle but prices soonreturn within the triangle borders before reaching the triangleapex. Breaks out a bit sooner than genuine breakouts andsometimes on light volume.
Breakout direction
Unknown ahead of time. A breakout has prices moving wellaway from the triangle, not quickly returning as in apremature breakout. If they do return (a throwback orpullback), prices generally bounce off the trendline or apex.
Duration
Typically longer than 3 weeks, at a minimum. Formations 3weeks or less classify as pennants.
apex. We see in the Statistics section of thissometimes occurs sooner than a genuine br
Genuine breakouts, in comparison, ustion. If prices throw back to the top or pull
either after the triangle apex or touch the tr
though, prices do return for more work withback out, occasionally in the adverse direct
When considering a triangle such asbreak out downward because of a trend cha
direction, it is easy to label the brief breako
Prices ease out of the formation top and quthe other side. The upward momentum oftainable and prices drop $5 in one session,continued down, eventually reaching a lowFigure 41.3 shows two triangle formavalid symmetrical triangle. The left trianglelow at point A and rises to the minor high alowing the top trendline and reach the min
is only one minor high (point B) and twolow, point C, is not included in the triangle.Minnesota Mining and Manufacturing (Chemical (Diversified), NYSE, MMM)
low missing, but the bottom trendline is dr
Premature Breakout
Gleason Corp. (Machinery,
Jan 93
Figure 41.2 A symmetrical triangle top with a premature breakout. Prices closeoutside the triangle but return before the apex. In this instance, prices not only
return but shoot out the other side. Numbers mark the various trendline touches.A dead-cat bounce sees prices tumble $5 in 1 day then bounce up and eventuallymove lower.
564
)ul 95
Figure 41.3 Two symmetrical triangle topsangle on the right shows a premature dowupside breakout. The triangle on the left is bo
566
Triangles, Symmetrical Tops
space in the center of the triangle is often a clue to an improperly identifiedformation. Prices should cross the formation and fill the space.The second triangle shown in mid-October has plenty of minor highs andlows that touch the two trendlines. It is a valid symmetrical triangle but it hasa kicker. Just before the triangle apex, prices move outside the triangle trendline boundaries, pull back, and move sharply higher.I do not consider this downward poke to be a downside breakout becausethe breakout direction is predominantly upward (that is the direction in which
Office Depot (Office Equipment ft
prices moved furthest). I call the 3-day downside move a premature breakout.
A premature breakout, either upward or downward, must have a daily closeoutside the triangle trendlines and must eventually return to the chart pattern.The volume trend is predominantly downward in both chart patterns.Volume is 60,100 shares at the start of the October triangle but recedes untilthe day before the breakout, when only 4,600 shares trade. Quite a decline.Before you pronounce a chart pattern to be a symmetrical triangle, lookto the left of the formation. Is there a minor high that mirrors the one on theleft? If so, then you might be looking at a head-and-shoulders top.A mirror image of the symmetrical triangle, one that is back to back withthe one you have selected, probably represents a diamond top or bottom.When one of the trendlines is horizontal, then the formation is an ascendingor descending triangle. All these other formations are ones that you need tosearch for. Many are more powerful than a symmetrical triangle and give a bet-
Aug93
Figure 41.4 A symmetrical triangle that idownward and pull back to the formation,move higher. The formation is a 5% failure bpoint A) before reversing.
ter gauge to the ultimate price move.
Focus on Failures
know the answer, then do not make a tradesure you use a stop to limit your losses. Mdecline so that you catch as much of the m
If you have searched for other patterns and are sure a symmetrical triangle isvalid, how can you be sure it is going to work as expected? You cannot. Look at
Statistics
Figure 41.4. It is a symmetrical triangle with a downside breakout. The breakout pulls back to the lower trendline, begins drifting down again, then just asquickly returns to the triangle apex. It brushes by the formation and moveshorizontally for a month before resuming the intermediate-term uptrend.
Table 41.2 shows the first batch of statisseparated the 400 or so formations I uncov
Figure 41.4 shows what I call a 5% failure. A 5% failure is when prices
bottoms have them moving down. Thenthose with upside and downside breakoutI uncovered almost twice as many twith downward ones. Since the entry intotrend, those formations with upward brprice trend.The failure rates, at 5% and 6% forbelow the 20% maximum that reliable fofail out of over 250, which is a very goodThe average rise from an upside busual 40% for bullish formations. Down
break out and move less than 5 % before turning around and moving substantially in the other direction. Fortunately, 5% failures are rare with symmetri-
cal triangles. However, as you can see, they do happen, and you need to protectyourself from them.As you look at the figure, you can see that prices initially break out downward after having moved up from the lows in August. Most of the triangles actas a consolidation of the trend, so that is the direction to bet on. Since thetrend is upward leading to the formation, prices should shoot out the top, butthey do not. When they go against the grain, ask yourself if that is the naturalflow. Is there a fundamental reason prices are moving down? If you do not
ing on the price trend leading to the form
568
Triangles, Symmetrical TopsTable 41.2General Statistics for Symmetrical Triangle Tops
Description
Upside Breakout
Downside Breakout
Number of formations in500 stocks from 1 991 to 1 996
162
93
Reversal or consolidation
1 62 consolidations
93 reversals
Failure rate
8 or 5%
6 or 6%
Average rise/decline ofsuccessful formations
37%
20%
Most likely rise/decline
20%
15%
Of those succeeding, numbermeeting or exceeding pricetarget (measure rule)
124 or 81%
54 or 62%
Average formation length
2 months (57 days)
2 months (50 days)
Breakout as percentage ofdistance to apex
78%
79%
expectations by declining 20% on average. The most likely gain is 20% and
Figure 41.5 Frequency distribution of losses for symmetrical triangle tops. Notethat the most likely decline is 15%.
15% for upside and downside breakouts.Figure 41.5 shows a frequency distribution of losses, indicating where
losses from most trades reside. In this case, there are few large declines so themost likely decline is also the tallest column (the one with the highest frequency). Almost half the formations (46%) have losses less than 15% and 77%
have declines less than 25%. If you decide to short a stock, your losses mightnot be as large as you hope.Figure 41.6 shows a frequency distribution of gains with the 20% columntowering above the others. It is reassuring that only a third of the formations
have gains less than 20%. To put it more optimistically, 65% of the formationshave gains over 20%. With such large gains, you would expect the measurerule to perform well. It does, with 81% of the formations meeting or exceeding their price targets. I consider values over 80% to be reliable. Downsidebreakouts perform less well, with just 62% of the formations meeting theirtargets. I explain the use of the measure rule in the Trading Tactics section ofthis chapter.
The average formation length is about 2 months and both upward anddownward breakouts exit close to 80% of the way to the apex. I took a closerlook at the breakout distance to the apex and graphed the results in Figure 41.7The figure shows that most formations have breakouts that hover around 80%to 85% of the way to the apex. I originally thought that most symmetrical triangles had breakouts that were about two-thirds of the way to the apex, just asdo ascending and descending triangles. But symmetrical triangle formationsbreak out later. This gives an aggressive investor more opportunity to profit
40
50
60
Percentage Gain
Figure 41.6 Frequency distribution of gains for symmetrical triangle tops. Themost likely gain is 20%.
569
570
Triangles, Symmetrical Tops
Statistics
571
Table 41.3Premature Breakout Statistics for Symmetrical Triangle Tops
I
75
80
85
Distance to Apex (%)
Upside Breakouts
Q Downside Breakouts
Figure 41.7 Frequency distribution of the breakout distance to the apex. Mostformations break out 80% to 85% of the way to the apex.
Description
Breakout Upward
Breakout Downward
Number of premature breakouts(up or down)
23 or 14%
1 8 or 1 9%
Number of premature upsidebreakouts
5 or 3%
15 or 16%
Volume at upside prematurebreakout
88% of 25-daymoving average
moving average
Number of premature downsidebreakouts
20 or 1 2%
9 or 1 0%
11 6% of 25-day
Volume at downside prematurebreakoutOf formations showing prematurebreakouts, number having both upand down premature breakouts
229% of 25-daymoving average
66% of 25-daymoving average
2 or 9%
6 or 33%
Upside premature breakout distanceto apex
76%
74%
Downside premature breakoutdistance to apex
72%
71%
Note: Premature breakouts occur sooner and sometimes on lighter volume.
from the intraformation swings: Buy or cover your short at the lower trendline.
and sell or sell short at the top trendline.Table 41.3 shows various statistics related to premature breakouts. Apremature breakout is when prices close outside the formation boundary butquickly return to the chart pattern, usually within a few days. Premature break-
outs are rare, occurring less than 20% of the time for both breakout directions.Premature upside breakouts are more plentiful (16%) in genuine downside breakouts than in upside ones (3%). Volume at an upside premature
tic is not quite enough to include in your trading plan, but throwbacks andpullbacks give you the opportunity to add to your position. On average, they
take just short of 2 weeks to return to the trendlines or triangle apex.It takes almost three times as long to reach the ultimate high as the ultimate low. That is a bit longer to travel not quite twice as far than is shown byother chart types.
breakout is below average, at 88% of the 25-day moving average, but is 116%
Table 41.4Breakout Statistics for Symmetrical Triangle Tops
when it appears in formations where the genuine breakout is downward.Downside premature breakouts are less plentiful, at 12% and 10%, respectively for upside and downside genuine breakouts. The volume pattern is just
Description
Upside Breakout
Downside Breakout
the reverse: heavy in those formations with genuine upside breakouts and light
Throwbacks/pullbacks
94 or 58%
55 or 59%
Average time to throwback/pullback completion
1 3 days
11 days
For successful formations, daysto ultimate high/low
6.5 months (192 days)
2 months (70 days)
or high (H)
L7%, C22%, H71%
L10%, C30%, H61%
Percentage gain/loss for each12-month lookback period
L29%, C35%, H40%
L23%, C20%, H20%
in formations with genuine downside breakouts. A third of the formationsshowing premature breakouts have both up and down premature breakoutswhen the genuine breakout is downward.
Premature break