The symmetrical triangle (or the coil) is usually a continuation pattern. It represents a pause in the existing trend after which the original trend is resumed. In the example in Chart, the prior trend was up, so that the percentages favor resolution of the triangular consolidation on the upside. If the trend had been down, then the symmetrical triangle would have bearish implications.
The minimum requiremet for a triangle is four reversal points. Remember that it always takes two points to draw a trendline. Therefore, in order to draw two converging trendlines, each line must be touched at least twice. In Chart, the triangle actually begins at point 1, which is where the consolidation in the uptrend begins. Prices pull back to point 2 and then rally to point 3. Point 3, however, is lower than point 1. The upper trendline can only be drawn once prices have declined from point 3.
Notice that point 4 is higher than point 2. Only when prices have rallied from point 4 can the lower upslanting line be drawn. It is at this point that the analyst begins to suspect the he or she is dealing with the symmetrical triangle. Now there are four reversal points (1, 2, 3, and 4) and two converging trendlines.
While the minimum requirement is four reversal points, many triangles have six reversal points as shown in chart.
This means that there are actually three peaks and three troughs that combine to form five waves within the triangle before the uptrend resumes. (When we get to the Elliott Wave Theory, we’ll have more to say about the five wave tendency within triangles.)
Time Limit for Triangle Resolution
There is a time limit for the resolution of the pattern, and that is the point where the two lines meet—at the apex. As a general rule, prices should break out in the direction of the prior trend somewhere between two-thirds to threequarters of the horizontal width of the triangle. That is, the distance from the vertical base on the left of the pattern to the apex at the far right. Because the two lines must meet at some point, that time distance can be measured once the two converging lines are drawn. An upside breakout is signaled by a penetration of the upper trendline. If prices remain within the triangle beyond the three-quarters point, the triangle begins to lose its potency, and usually means that prices will continue to drift out to the apex and beyond
The triangle, therefore, provides an interesting combination of price and time. The converging trendlines give the price boundaries of the pattern, and indicate at what point the pattern has been completed and the trend resumed by the penetration of the upper trendline (in the case of an uptrend). But these trendlines also provide a time target by measuring the width of the pattern. If the width, for example, were 20 weeks long, then the breakout should take place sometime between the 13th and the 15th week.
The actual trend signal is given by a closing penetration of one of the trendlines. Sometimes a return move will occur back to the penetrated trendline after the breakout. In an uptrend, that line has become a support line. In a downtrend, the lower line becomes a resistance line once it’s broken. The apex also acts as an important support or resistance level after the breakout occurs. Various penetration criteria can be applied to the breakout, similar to those covered in the previous two chapters. A minimum penetration criterion would be a closing price outside the trendline and not just an intraday penetration.
Importance of VolumeVolume should diminish as the price swings narrow within the triangle. This tendency for volume to contract is true of all consolidation patterns. But the volume should pick up noticeably at the penetration of the trendline that completes the pattern. The return move should be on light volume with heavier activity again as the trend resumes.
Two other points should be mentioned about volume. As is the case with reversal patterns, volume is more important on the upside than on the downside. An increase in volume is essential to the resumption of an uptrend in all consolidation patterns.
The second point about volume is that, even though trading activity diminishes during formation of the pattern, a close inspection of the volume usually gives a clue as to whether the heavier volume is occurring during the upmoves or down-moves. In an uptrend, for example, there should be a slight tendency for volume to be heavier during the bounces and lighter on the price dips.
Measuring TechniqueTriangles have measuring techniques. In the case of the symmetrical triangle, there are a couple of techniques generally used. The simplest technique is to measure the height of the vertical line at the widest part of the triangle (the base) and measure that distance from the breakout point. Figure 6.2 shows the distance projected from the breakout point, which is the technique I prefer.
The second method is to draw a trendline from the top of the base (at point A) parallel to the lower trendline. This upper channel line then becomes the upside target in an uptrend. It is possible to arrive at a rough time target for prices to meet the upper channel line. Prices will sometimes hit the channel line at the same time the two converging lines meet at the apex.