The doyen of Technical Analysis, Robert W. Schabacker, in his ground-breaking book, “Technical Analysis and Stock Market Profits“, described symmetrical triangles as such,
In its basic form, which we will take up first, it has the appearance of an equilateral triangle lying on its right side, with its base a perpendicular line at the left side of the formation, and its median line a horizontal one extending to the right. Its apex is also formed to the right, therefore, and the entire triangle points in that direction, to the future chart formation instead of the past. We shall refer to this basic form hereafter as the Symmetrical Triangle.
Symmetrical Triangles are important chart patterns that appear quite often on charts of various timeframes for all securities. They start with wide swings of the price range, when neither the buyers nor sellers could maintain control for long time . The wide-swings give way to gradual and symmetrical narrowing down of the range as both sides try to reduce their efforts (and risk) in order to figure out who is going to win. This goes on until an apex is reached when the price range becomes very small and the volume decreases too. As with any other pattern, a perfect formation never happens and symmetrical triangles contain a variety of irregularities, so discretion should be applied in identifying them.
A Period Of Indecision
Symmetrical triangles indicate a period of indecision and could result in a reversal or continuation of the preceding trend. Unlike some other patterns, like Head-&-Shoulder, a symmetrical triangle does not give any clues which way it will breakout once it is complete. However, even though we do not know, during its formation, which way it will resolve, we do know this much that somewhere after the apex there is a strong chance of a move in one direction or the other.
One way to predict the post-pattern direction is to consider other factors including the whole movement preceding the beginning of the pattern. If the preceding trend has just started from a congestion area and/or is not giving reversal signals then the odds are higher that the symmetrical triangle will be a continuation. If, on the other hand, the preceding move has been undergoing for a long time and is giving exhaustion signals, then odds will be higher of a reversal.
Many times, fundamental factors also affect the resolution of this pattern. Factors like earnings, future prospects and other economic news give us clues to post-pattern direction.
Usually, the wide swings at the beginning of the pattern occur around significant support or resistance levels. They could also happen before any impending important news or event. Similarly, the break from the apex is usually accompanied by either the resolution of the impending news or event or a breakout from the support or resistance level.
The impending news or event could turn out to be as expected in that case the pattern will become an intermediate or continuation. In case the news or event throws a surprise then the pattern will become a reversal pattern. Similarly, a break of resistance to upside or break of a support to downside will make the pattern a continuation. Whereas, a rejection at these levels will turn it into a reversal.
Continuation or Intermediate Pattern
More often than not, symmetrical triangles end up as an intermediate or continuation formation. Hence, it should be generally assumed that a symmetrical triangle will be a continuation unless there are other factors pointing to a potential reversal of preceding trend.
Below is an example of Symmetrical Triangle as a continuation patterns. This is a 30-minute intraday chart of e-mini S&P futures (or ES #F in eSignal application) from April 20, 2016 to May 04, 2016. The rectangle bounded by line UL1 and LL1 shows a top forming after close of New York session on April 20th. The break down from that pattern resulted in a trading range April 27th. The first attempt to break above the upper limit of this range (bounded by UL2) failed. The price then tried to break below the lower limit of the range (bounded by LL2). this too failed. The price bounced up but failed to reach UL2. The move following this rejection took the price to level LL2, which is below the lower bound, LL2.
The breakdown from the trading range occurred during the last hour of NYSE trading on April 28th. From that time to next day’s NYSE session open, futures carved out a symmetrical triangle. The middle of the triangle is revolving around the LL2 line, which was the lower bound of the trading range that lasted from April 21st to April 28th. The broken support was in danger of becoming a resistance.
The push made by the bulls before the NYSE session open to regain the ground above support coincided with the merging of two lines forming the symmetrical triangle. The push failed and price fell below the lower bound of the triangle, thus making it a continuation pattern.
The chart shows the breakdown of three patterns. One is the horizontal channel or rectangle box bounded by UL2 and LL2, second is the symmetrical triangle and the third is the ABCD pattern (H1-L1-H2-L2 on the chart).
The high of the rectangle box is 2094.25 and the low is 2070.25 giving it a height of 24 points. The breakdown point is 2070.25 and the measured target of this patterns is 2046.25, the low of LL2 is at 2045.75.
The height of CD leg in ABCD pattern is related to the height of AB leg, either CD = AB or a multiple of AB by a Fibonacci ratios. The height of AB leg, or H1-L1 leg, is 28 points – H1 is at 2093.50 and L1 is at 2065.50. The point D or L2 is at 2045.75, which 29 points below point C or H2 of 2074.75.
Similarly, the measured target from the symmetrical triangle also within the vicinity of the point LL2. The perpendicular height of the triangle is approximately 11.50 points from a high of 2077.00 to a low of 2065.50. The breakdown of the triangle occurred near 2068.50. The decline from that point to the low of LL2 is 22.75, which is almost twice the height of the triangle.