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Technical Analysis of Stock Trends
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| Symmetrical
Triangle |
Tuesday March 09, 2010 |
Technically speaking, a symmetrical
triangle is a rally to a relative new high, a pullback to an intermediate
term support level, a second rally that does not exceed the recent
high, a second decline that falls short of the intermediate term
support level followed by a breakout on strong volume above the trend
lines created by joining the new high and the secondary high.
Why Does It Happen?
Most consolidation patterns are
about indecision -- traders are uncertain about the near term
direction of the stock so they do nothing. Symmetrical
triangles are different because when a stock falls into one of
these patterns, traders actually behave as though they have
reached a consensus regarding price. We know this because
there is a uniform narrowing of price over time. Symmetrical
triangles usually develop
after a stock has had a spectacular move. After reaching a relative new high
price momentum may begin to fade modestly and the stock works
lower. Because the fundamental news is so strong, Wall
Street analysts will often dismiss this weakness as mere
profit taking following a lengthy advance. The stock slips
back to an intermediate term support level and price
stabilizes. At this point it is common for the stock to
begin moving higher on a positive fundamental development.
Perhaps the firm has raised guidance, announced a stock split or unveiled
a new product but price slowly begins to move
higher. There is one problem, volume is noticeably lighter
than previous rallies. The price rally continues but falls
short of the recent new high. This secondary high will be an
important point later in the formation of the pattern. After
several days of strength, momentum once again fades and price
begins to falter. Slowly the stock moves lower on no
specific news and extremely light volume. Sensing that
sellers may not have an appetite to continue selling buyers
reappear and the stock stops short of the intermediate term
support level. This secondary low completes the bottom
parameter of a uniform or symmetrical triangle. Over time the stock begins to
trade in an increasingly narrow range characterized by a series of lower
highs and higher lows. As time passes traders
grow to believe that the current stock price accurately reflects the true
value of the stock. Volatility and volume slow dramatically as the stock approaches
the apex of the triangle. Then, abruptly there is a fundamental
development that leads to a dramatic upside breakout. Volume
swells and Wall Street analysts begin making new "buy" recommendations
and raising their price targets. As prices
moves beyond the upper parameter created by joining the recent new
high and secondary high some investors that had felt the stock was
fairly priced at lower levels begin selling but their shares are
quickly absorbed by buyers. In fact, the demand for the
stock becomes so intense that price very quickly surges beyond the
recent new high. Weeks later the stock moves significantly
higher.
How are Technical Targets
Derived?
Technical targets for symmetrical triangles are
derived by adding the largest vertical height of the
triangle to the ultimate breakout level.
Symmetrical
Triangle for Transocean
Vital Signs
-
Symmetrical triangles
are about growing consensus among traders so a
breakout from the triangle means that one group of investors, (bulls or
bears) have been forced to abandon everything they believed about price.
This sudden imbalance between supply and demand always leads to a violent
move in price.
-
Generally, most issues will
record a breakout (either higher or lower) about 2/3 through the
pattern. If a stock moved all the way to the apex of the triangle
the initial breakout is almost always false and should be avoided.
-
Because supply and demand are in
equilibrium within the triangle, volume should slow
dramatically. Once a breakout has occurred, volume MUST
increase significantly.
-
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.
descending
triangle 
bull flags
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