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Descending Triangles

Introduction

As previously discussed, Support & Resistance are key price levels highlighting the relative enthusiasm of buyers and sellers. These levels display the psychology of different market participants at those levels. Descending triangles are usually considered continuation patterns, essentially a pause before the original downtrend resumes.

Descending

Descending triangles are a version of the Symmetrical Triangle. They can be identified by at least 2 lower highs and two horizontal lows. When trendlines are drawn across the highs and below the lows, they converge to form a descending triangle or falling wedge. The pattern is normally considered a continuation of any existing downtrend, however, they can also lead to reversals in uptrends. As always, confirmation is required, in this case via a valid breakdown from the pattern. Price targets for the following move can be calculated by A) taking width of base of triangle and projecting downwards from breakdown point, or B) copying falling line and placing parallel from bottom of base to form a channel.

Requirements

1) Existing downtrend required so triangle can serve as pause before continuation lower. Uptrend required so pattern
can serve as reversal. Pattern serves to build up selling pressure. Not valid in sideways trend.

2) Volume sees overall decline as pattern develops, and ‘should’ pop on breakdown (shares can fall on low volume).

3) Pattern can take from a few weeks to build, but can also take many months. Average 1-3 months.

4) Breakdown should occur between ½ and ¾ of way through pattern. Extending trendlines to join (apex) allows estimate of duration of triangle and expected breakdown area. If price action moves beyond ¾, pattern becomes suspect. Breakdown before ½ normally premature.

5) Breakdown normally sees pull-back to prior support, which should then revert to resistance.

6) When using parallel trendline for target measurement, target line should end in-line with apex.

Our working example shows a breakdown between ½ and ¾, on higher volume and targets being met.

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