A Lesson on Intraday Triangles and Divergences

Jul 17, 2009: 5:28 PM CST

The current S&P 500 60-minute structure (and SPY) give us valuable lessons in two ascending triangle breaks and multi-swing divergences.  Let’s see what we can learn from this chart.

In classic technical analysis, you are taught that ascending triangles (which there are two examples on this chart) are expected to break to the upside.

However, in today’s markets, my suggestion is to take triangles for exactly what they are – consolidation patterns as evidenced by the “Price Alternation” Principle.  Generally, a triangle breaks in the direction of the prevailing trend but doesn’t always give a tradeable edge.

The edge from triangles comes from expecting an ‘expansion’ or impluse swing/move once a clean break has occurred and trading in that direction.

We see in this example that price cleanly broke out of the triangles with gaps… and though you may have thought you were late to the party, odds favored lower prices yet to come due to the expectation for range expansion.

Moving on from triangles to divergences….

We see two examples of a ‘three push’ or multi-swing divergence as we turn the corner into July – both of which preceded tradeable price reversal swings (including this last swing up, which I mentioned as a likely course of action in last Friday’s “Idealized Trades Daily” report).

Generally, when you get a triple-swing divergence, price will form a reversal swing in the direction momentum is building.  I discussed this principle and how to trade “Three Push” patterns in my presentation last Wednesday with FuturePath Trading and LBRGroup – the slides are now available on Linda Raschke’s website for download for attendees.

I wanted to highlight these chart examples as lessons to you.  Each day, I share in-depth “Teaching Moments” and how to recognize trade set-ups and type of day function in my “Idealized Trades” Daily Reports, which also allow me to share my bias and expectations (along with levels to watch) in the upcoming trading day.

Please take a moment to view more information about this new service which is designed to teach you the skills and tricks of the trade necessary to become a better trader through multiple examples of these concepts each day.  Seeing these patterns repeat and having them described to you increases your confidence to trade these patterns and recognize the day’s structure developing in real time “in the heat of battle.”

Corey Rosenbloom, CMT
Afraid to Trade.com

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Comments
  • Bob
    Triangles appear in all time frames and reflect price consolidation. The coiled spring implications are attractive from a trade perspective, but the pattern tends to be somewhat unpredicatable with respect to breakout directionality. The triple swing divergence is a nice "tell" increasing the probability you get on the right side of the move, which is important since price exiting a triangle tends to be dynamic.

    Triangles often form five wave counts within the trend line bounds. As these counts enter the fifth wave and approach a bound, it's a good idea to pay close attention.

    Price projections derrived from a triangle can also provide a solid price target pointing to where price may actually find future support. Once price cleanly breaks (watchout for the false break head fake), directionality is defined and a known target can be projected. Fib analysis will often confirm Support & Resistance near the target level too.

    Combining Elliot Wave counts can also provide insight into where price resides within the larger pattern. Directionality can be inferred from the count.

    In this example, the larger ABC corrective wave starts with five waves down (A); A consolidative five wave triangle forms in the middle (B). There negative divergence points to further downside and price confirms, heading lower; Then another five wave count to the bottom (C). There positive divergence points to a bounce and price confirms.

    An excellent example depicting multiple trade set-ups over the period.

    Thanks for the post Corey!
  • Dominick
    Hello Corey, can you provide a quick explanation of the Price Alternation Principle, or maybe just a link to an explanation. Thanks.
  • Sure!

    The full version states "Price Alternates Between Range Expansion and Contraction" and I will be offering a full lesson on this topic soon. Other lessons are found at

    http://premium.afraidtotrade.c...

    The basic idea is that price seeks equilibrium between buyers and sellers (consolidation). But when a new burst of info enters the equation, one side is squeezed (stop losses) while the other side is (let's say) buying long which creates 'positive feedback" and price expansion moves as price then seeks a higher equilibrium.

    You can take advantage by trading the trend moves from one value area to the next.
  • hanshennissen
    Hi Corey,

    many people expected a trust down around 12th July.
    But it was a bear trap.
    Was it possible to see that this would turn out to be a bear trap?

    What did you expect on 12th of July?

    Bye,
    Hans
  • It's a matter of archived files for my subscribers in my Friday report but I noted the higher low and positive momentum building and also in my weekend Intermarket Report highlighted the "tri-star" doji pattern at critical support and reported that I believed bulls would do whatever it took to cause a bounce off this level but that everyone was expecting a downside break which - from a pure contrarian standpoint - should have at least given a bullish opinion.

    I concluded Friday July 10th's report by saying:

    "Right now, it's a struggle/battle and both sides know what's at stake - more traders are bearish than bullish, which means that if bulls can push us up through 890, a lot of stop-losses will be triggered and a large short-squeeze (bullish) could unfold quickly so you'll want to try to participate in that intraday."

    No - it's never possible to see in advance what will be a trap or not for certain, but if *everyone* thinks something is going to happen, odds then switch to favor the *opposite* happening in full measure.

    All it took was a little spark and we see the rally that unfolded but I admit it had more power than even I anticipated during the weekend before.
  • reggieperrin
    interesting gap around 91
  • lrnrav
    Isn't this an Island and breakaway formation. I thought symmetrical triangles are not a play on breakaways, no?
  • I'm not sure this is an Island Formation - if so, we would prefer the gaps to be a little cleaner.

    Symmetrical Triangles are based on the "Price Expansion/Contraction" principle, in that price alternates between range contraction (the triangle) and expansion (the breakout move you aim to trade). The edge comes from the tight stop at the opposite side of the triangle and the much larger price target that comes from the expansion move. If even 50% of the triangles you trade 'work,' then you have the edge from the larger target relative to the stop.
  • geod2
    It also seems like the ascending triangle usually has a last minute headfake "throwover" in the opposite direction of the eventual breakdown...just to fool as many of us as possible, I suppose. Both of your examples have throwovers. I have found this failed headfake to be a pretty good telegraph that a breakdown lower out of the triangle will occur. Do you agree?
    New subscriber to your website...having a great time. Keep up the great work!!
    George
  • Geod,

    Headfakes are common in most patterns, particularly the ones everyone sees and tries to trade.

    Exactly - I refer to it as an "F-You" trade in where you take a classic signal, get stopped out, then price flips to the opposite direction. Part of the acceleration is from people's stops being taken out en masse and the opposite side adding fuel to the fire because they waited for the failed break to materialize.

    This is how you get some of the most powerful moves but it almost takes that 'smack in the face' to lead to a better than expected trade.

    Thanks! Glad to have you as a reader and subscriber! All the best.
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