From the June 01, 2012 issue of Futures Magazine • Subscribe!

Trading stocks with triangles

Ascending triangles

This pattern is made up of one trendline drawn horizontally to mark resistance and a second trendline connecting subsequent higher lows that mark support. An ascending triangle generally is a continuation pattern formed during a consolidation after an uptrend. Volume usually diminishes during the formation of the pattern.

An ascending triangle should contain at least two similar highs, not exactly equal, but in rough proximity to each other, forming the upper horizontal trendline. At least two higher lows are required to form the lower ascending trendline. The standard trading approach is to set an entry order above the resistance line and a sell order below the slope of the higher lows.

The formation of an ascending triangle is rather strict, so if the stock sets a low equal to or less than the previous low, breaking the upward slope of the lows in the formation, then the triangle is invalidated.

As seen in “Short-term triangle” (below), 15-minute price action in the S&P 500 is unable to cross the resistance line of 1279 after at least five attempts. Each effort is met with selling pressure. Also, buyers start to gain strength as the S&P make higher lows — 1257 and 1265 — as shown in the chart.

Ascending triangles generally are considered to be bullish patterns, but that’s not always the case; they do break out on the downside, as well.

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