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Recommended
Technical Analysis of Stock Trends
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Ascending
Right Angle Triangle
Technically speaking, an ascending right angle triangle is rally
to a new high followed by a pull back to an intermediate support
level, a second rally to test the first peak followed
by a second decline to a level higher than the intermediate term
support level and finally a rally to fresh new highs on
strong volume.
Why Does It Happen?
These patterns typically occur after a
stock has had a strong move higher due to a positive fundamental
development. Investors come to believe that much higher
stock prices are justified given the improved fundamental outlook
but a large portion of investors that were smart enough to have
bought the stock at much lower prices disagree. These
"smart money" investors consider the
extreme optimism as little more than an opportunity to liquidate
positions. Using fundamental
metrics, they set a price to sell their large blocks of stock and
wait. In effect, they are beginning a distribution process
based on their interpretation of fair value. The first step
in the distribution process occurs after one particularly bullish fundamental
development. The stock surges to a new high and Wall Street
analysts begin pounding the table with new "buy"
recommendations. The increased volume is a perfect
opportunity for the smart money to liquidate positions. They
begin selling and the rally is stopped in its tracks creating a
small top (top#1). As buyers realize that there is plenty of supply at
this level prices begin to falter and in short order the stock trades
back to a previous intermediate term support level. Because
this low is the reaction to the previous rally to new highs, it is
often called the reaction low. In this very limited
sense, ascending right angle triangles are very much like double
and triple tops -- rising demand meets entrenched supply. In
fact, because the fundamental
news is so strong Wall Street analysts dismiss the weakness as
simple profit taking and a new rally soon begins. On strong
volume the stock surges toward the recent high where it is once
again rebuffed by aggressive sellers (top#2). It is at this point that speculators
recognize a trend and they begin adding new short positions just
beneath the recent high. This added selling pressure
should push the stock significantly lower but bullish enthusiasm
is rampant. The stock does move lower but the pull back is
subdued, in fact, the stock does not reach the reaction low set in the
aftermath of the first move to new highs. Days later another
positive development occurs and the stock begins moving toward the
recent high on very strong volume. Speculators step-up and
add to their short positions but the supply of stock from smart
money investors is being satiated. It soon becomes clear that buyers are
going to win this battle because sellers are running out of stock
to sell. As the stock pierces what had been strong
resistance a strange dynamic occurs, those traders that had been
selling the stock short at the recent high are motivated to cover short
positions to cut losses -- thereby creating increased demand for the
stock at a time when supply has been severely curtailed.
Against this backdrop ongoing bullish enthusiasm leads to a
spectacular price breakout on strong volume. Very soon after the breakout
several fundamental analysts make positive comments, exacerbating the imbalance between supply and demand. Weeks later
the stock surges to a substantial new high. In this rare
instance smart money investors are trumped by ongoing bullish
fervor and the level that had been resistance becomes important
support.
How
are Technical Targets Derived?
The technical target for an ascending right angle triangle is derived by measuring the vertical height of the triangle and applying this
length to the new breakout level.
Ascending
Triangle for Arch Coal Inc.
Vital Signs
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Ascending triangles are among the most
reliable of all technical patterns because both supply and demand are
easily defined.
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The defining characteristic of ascending right angle triangles is the
pattern of rising lows and a series of equal highs. This combination of
points can be connected to form a right angle triangle. If a stock
violates any part of the triangle during its formation the pattern it
should be considered void and trading positions should be abandoned.
-
Triangles are about indecision and as such
volume should slow noticeably as the pattern is being constructed. It is most important that volume
surge as the stock rallies through the reaction high. This tells the
technical trader that supply has been absorbed, short covering is rampant
and the next leg of the bull phase is about to begin.
-
Upside
breakouts often lead to small 2-3% rallies followed by an
immediate test of the breakout level. If the stock
closes below this level (now support) for any reason the
pattern becomes invalid.
rectangle
descending
triangle
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Ascending Triangle 
