CHARTING Of triangles and false break-outs

Press, 29 January 1986, Page 34

CHARTING Of triangles and false break-outs

This is the fifth in a series of articles on charting by GEORGE PRICE, of Egden Wignall Futures.

In our study of secondary tops, or opportunity patterns, we turn our attention to triangles. Triangles are rarely formed as major tops. They are more likely to be continuation patterns once a market has sig-

nalled its new primary trend. Of all the chart patterns we have examined, or still have to examine, triangles, unfortunately give the most false signals. Why this is so I do not know, save to say there are many times I have nearly pulled my hair out in utter frustration. False break-outs are the chartist’s nightmare, and triangles have their fair share. A good chartist has the wisdom and resources to put up with this type of aberration, and wait for another opportunity. Having said all that, let me re-assure the reader that they can also be extremely profitable.

The two most common triangles you are likely to encounter are the symmetrical triangle and the flat-bottomed triangle. A triangle is known to some analysts as the coil formation, not only because it does resemble a tightly coiled spring, but also because, like a spring that is wound ever tighter, the break-out from a coil is frequently explosive.

Coiled spring in a flatbottomed triangle Of course, when you find either of these types of triangles being formed on a share or commodity chart you will have to draw in your own trend lines, or boundaries. Remember that a formation boundary line must connect two points. In other words, there must be two tops and two bottoms in the formation. Let us now look at our two examples and see how triangles are formed. In the case of our March cotton chart we see a tight battle between investors and farmers anxious to unload cotton (supply) and others anxious to buy (demand). At 80 cents per lb, the sellers were keen to supply and overwhelmed the buyers, pushing the price down to 76.5 cents. Buyers then entered the market and quickly bought up the supply, pushing the price back up to the 80c level.

And so the battle raged, each side becoming more aggressive. The bears became more content to sell at lower levels, and the

buyers were happy to pay higher prices. The struggle between the bulls and bears took 1y 2 months to resolve and finally, when the price broke the bottom of the triangle boundary on August 1, 1981, at 78.2 c per lb, the bears had gained the upper hand, and prices plunged to 68c within a month. About nine billion pounds of cotton changed hands in that symmetrical triangle pattern with a monetary value in the order of $7,110,000,000. And we’re not talking about Monopoly, either.

In the case of our November lumber chart we can soon see which side is the more aggressive. The buyers were content to do most of their buying at $1.85 and it was the sellers who had to keep dropping their selling levels. When prices finally broke the $1.85 level decisively the buyers’ capital had been exhausted and, with lack of buyers, lumber prices plunged to $1.45 within two months. The other rules for trading triangles are: • There will normally be a decrease in volume as the pattern moves towards the apex of the triangle.

• The break-out can be expected when it has filled about two-thirds or three-quarters of the

• The break-out of the boundary lines will usually be accompanied by high volume.

• The break-out will normally have a trading range where the market closes near its lows in the day’s trading range. • The minimum target after a valid break-out will be the width of the triangle measured from its open end (see lumber chart). This length is then projected down from the triangle boundary. • Triangles that do not break-out after travelling more than three-quarters of the length within the boundary lines should be viewed with suspicion. They are more likely to dribble right to the apex of the triangle and give meaningless signals. • It is not uncommon for a valid break-out to turn and come back to touch the boundary line again before turning lower. (See diagram.)

This should not deter you if you have taken a position, ■in the market. However, if the price reenters the triangle then abandon your position as there is likely to be a period where the market does not know where it wants to go.

Remember the rules and how to recognise triangles. They have been well tried and tested over the years.