Triangles

The best indicator of where price is likely to go (near-term) is the price chart itself. However, there are hundreds of indicators created to help solve this problem. Yet, all we have to work with on charts is:
- Price (Open, High, Low, Close)
- Volume
- Time
All indicators are derived from these three factors and their many combinations. The goal is to see into the future, to determine where the price will go! Forget it… We can never know with certainty where the price will go. We can improve the odds, increase the likelihood of our “guess-success,” and that can provide the “edge” needed for success in the market. Proper use of indicators can be very rewarding.
The price chart can send subtle messages and indicators can help understand those messages. But, of paramount importance:
Most price charts tell us nothing most of the time!
Studying past pick-performance this week I was struck by the following pick (EFJI) made on 5/21/04. The following price chart show what it looked like on the day of the pick. Lines are drawn to show the pattern as a symmetrical triangle.

Fig. 1. A symmetrical triangle pattern on EFJI.
Triangles come three ways, ascending, descending, and symmetrical. They are “continuation” patterns, meaning they are an interlude in an existing trend, often called a “consolidation.” They rest. Properly handled, they can provide some of the best short-term trade returns. The pattern shown in Figure 1 is a “symmetrical” triangle, starting with a wide range, then narrowing as highs decrease and lows increase about an imaginary horizontal center line. We will consider the symmetrical triangle in this chat, considering the other two in future chats.
During the period of the triangle as shown, there is some balance between the Bulls and the Bears, a momentary equilibrium. The action begins as the triangle comes to the apex, you know, when the immovable object meets the irresistible force. The price must break in some direction, and it is this breakout we’re focusing on. But, which way? You can pour over thousands of charts and find examples breaking both ways, up and down. But, here are the odds; if the pause occurs in a positive trend, the break will most likely be positive, in the direction of the trend. Let’s look at Figure 1 in a longer time frame so see the type trend we are in.

Fig. 2. Positive trend on EFJI.
Now, let’s see where the price has gone since the pick was made. The next chart shows a healthy increase from the $6.61 the day of the pick to $8.33 last Friday (26%). It could have been sold on 7/1/04 for $9.91 (40%).

Fig. 3. The continuation of the “continuation” symmetrical triangle on EFJI.
The risk can be minimized if we wait for the first significant move out of the triangle before we pull the trigger. The spike came on 7/26/04, closing at $7.45. Had we waited to see actually which way the break was going to go, we would have minimized our risk significantly but made less money (between 12% and 20%). Such is life in the fast lane. Remember, price can break either way out of a symmetrical triangle.
The following price charts show other tickers around the same date and the subsequent price action:

Fig. 4. Symmetrical triangle on DSPG.

Fig. 5. First, check the long term trend on a Weekly view to see “a continuation of what…

Fig. 6. We got the break we wanted, but must always exercise good money management to keep a profit from turning into a loss.

Fig. 7. ZGEN as a candidate breakout from a symmetrical triangle; It’s long term trend; Resulting breakout
Look at a couple of symmetrical triangles identified this week. Follow these carefully the next few days to see how they break.

Fig. 10. Two looks at ISNS, a symmetrical triangle.
An important feature of successful symmetrical triangles; the break usually comes after the third rise to the top of the triangle. In fact, if the pattern moves sideways much beyond the apex of the triangle, it has lost much of its potential. Also, the pattern fails if the rising lows fall below the lower trend line. Don’t hang around in either case. One more…

Fig. 11. Two looks at ISNS, a symmetrical triangle.
The second chart in Figure 11 above shows how the “congestion” pattern can occur in the middle of an uptrend development, similar to a “continuation gap.”
The examples shown have a bias toward positive breakouts from the symmetrical triangle. This is the direction we trade. However, this triangle by itself has no inherent bias and can break up or down with equal ease. We can improve the odds by choosing those in a strong uptrend and carefully waiting for evidence of the break before entering a position. As always, strict money management rules apply with stops to protect our capital.
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