Triangle formations at Trade10.com- The science of trading market momentum for stocks, options, futures and bonds.

Critical Day Analysis

Our critical day analysis is all about trend reversals. We tell you when there is a high potential for a reversal of the short trend and we've been doing it since 1994 with an 80%* accuracy.

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Triangles

When price fluctuations stay in a trading range and that trading range becomes progressively smaller with the passage of time a triangle formation occurs. Triangles are hard to use as a forecasting tool but there are some perceptions that follow from this type of formation that give insight into future market action. In the formation of a triangle, resistance and support area's are identifiable as daily fluctuations move toward the apex. Identifying triangle patterns allows for trading opportunity during formation and after a breakout from the pattern. Uncertainty is the basis or reason behind why each rally and each sell off has less market commitment. At some point that uncertainty is resolved enough or other factors tip the scales of supply and demand for the general market so that a breakout of the pattern occurs. A triangle could signal a reversal or continuation of the trend. The general trend of fundamentals and psychological sentiment in the market play an important role in the unfolding of price action and the resolution of patterns like triangles.

Symmetrical Triangles - Lines drawn connecting peaks and troughs tend to converge at the apex which is at the center of the pattern. When price breaks outside of the pattern and if accompanied by increasing volume, there is a high probability that the future price will trend in the direction of the breakout.

Ascending Triangles - A line connecting the peaks is horizontal while the line connecting the troughs rises and converges with the top line as a series of rising troughs meets resistance at the same level. Volume often remains moderate to low throughout the formation of the triangle with marked increases on the breakout.

Descending Triangles - Troughs form a horizontal line while a series of falling peaks create a line that is a downward sloping resistance line. The indication is that supply becomes more aggressive as sellers lower their valuation perceptions. Breakout is usually to the downside.

In the case of most triangles, the odds are that the trend leading into the triangle continues on the breakout of the triangle. Breakouts can occur usually as soon as 2/3 the distance to the apex through to the apex itself. It is not out of the question, when fundamental indecision and with no change in psychological setting in the market, for the market to continue in a sideways motion through the apex of an earlier triangle formation.

Triangles are subject to many false moves and are among the least reliable of chart patterns. Most traders allow for a 3 to 5% move outside of the pattern before the breakout is considered reliable. When a breakout occurs, the trend that results is expected to be in the direction of the breakout.

Generally, it is a good idea to watch volume when a breakout occurs. A breakout on increasing volume is a good sign for a continuation of the price trend in the direction of the breakout. The intensity of buying and selling pressure and the conviction behind each move can be useful in determining the validity of the break out. But remember that when markets are in a trading range there is a build up of stop loss orders just outside of the pattern, on both sides of the market, that can create volume spikes when a breakout does occur. It is a good idea to have fundamentals and psychological setting supporting the breakout.

Price projections can be useful in triangle formations. The price range of the base of the triangle opposite the apex is considered to be a fair estimate of the move that will occur after the breakout from the triangle formation.

To the right technical studies are examined in more detail to provide a sense of conformational evidence for traders of the critical day. Click on any of the terms to take a closer look at a technical discussion on that topic. All formations, patterns, indicators and technical tools fail at various times and so should only be used to build a body of evidence in forming a trading decision rather than being solely relied upon. There are a number of valuable studies that lead to intuitive understandings about price and volume but a strong compliment to technical analysis is an understanding of the trends and changes in the fundamentals and economic activity that ultimately lead valuation levels in the markets.

Walk through a critical day

The graphs show a price plot of the Dow Jones Industrials from Sept 28/00 to early November. The First graph ends on November 3/00, two days before an upcoming critical day on November 7/00. Our members looking at the market are expecting a trend reversal to occur due to the high rate of success in our research. Ideally a member will be using their own skills to judge the supply and demand changes, using technical and fundamental indications to confirm suspicions of a reversal, and trade accordingly.
On the second graph we see that the price action on November 6 was a bullish day, reversing the short trend so that the short trend leading into the critical day is now up. A critical day is an expectation of a reversal of the short trend that immediately precedes the critical day. In the case of the November 7 signal, given to members 3 days before, is an indication that the upward moving trend, recognized at the close of November 6 is expected to reverse direction.
On the third graph we can see that November 7 was a low volatility after a large gain on November 6 of about 160 points for the Dow Jones Industrials. The subsequent move over the three days following the November 7 signal saw the Dow Jones Industrials fall 376 points. The next day, November 13, the Dow Jones Industrials lost an additional 83 points with intra-day low a full 609 point loss since the open on the critical day.

Most recent signals

A closer view of the most recent signals. You can see the short trend immediately prior to a successful critical day, reverses coming away from the critical day. Often a failed critical day will indicate a stronger bias in the market for continuation of the trend that was in place prior to the critical day. A failed signal can therefore provide as much information and opportunity as a successful one. Take a look at tech studies to develop a sense of trend reversals and use.

Tech Studies

Comparative Relative Strength

Congestion Pattern

Consolidation