Dow 2000 Descending Triangle Break

Nov 19, 2007: 2:24 AM CST

In the interest of Technical Analysis Education, let’s quickly look back at the year 2000 when the Dow Jones Index resolved a descending triangle to the upside.

In technical analysis, traders often expect descending triangles to resolve to the downside and ascending triangles to resolve to the upside.

StockCharts.com defines  Descending Triangles as bearish formations that indicate distribution which usually form during a downtrend as a continuation pattern.

In this example (most of the year 2000), the Dow Jones Index actually resolved to the upside with a pattern completion (falling just shy of the ‘measuring rule’ which states that the distance from the greatest point in the triangle can be used to project the ultimate high of the break).

How might we have gleaned clues that the triangle consolidation may have resolved as such?

dow2000.jpg

There’s really no way to know for sure which direction any pattern will break, but you can glean clues to put the odds in your favor.

In this case, we began the year with a large volatility move to the downside which was terminated in March with a clear bullish momentum divergence. The ensuing move suddenly wiped away the losses for the year, and price began to consolidate into a triangle formation which seemed – to the naked eye – to have a bearish sort of formation. Buyers were stepping in around Dow 10,300 to support stocks in the index at that level. Should they fail to support that level, price would invariably go lower.

But wait… skilled technicians could have viewed the developing momentum divergence forming within the triangle for clues to a possible upside resolution.

Finally, in July, prices broke out of the declining trendline that was forming the descending triangle, but not before it experienced a ‘throw-back’ move and retested the midpoint of the consolidation triangle which had formed on the charts.

If you ever see a throwback (retest) of a consolidation break that holds, odds favor entering the market at that point and playing for a larger target.

In this case, the measuring rule inherent within the descending triangle breakout told us to play for 1,000 Dow Points (furtherest points at Dow 10,300 and Dow 11,300 for a projection at the break of 10,500 to project price to Dow 11,500).

Ultimately, price fell short of this target by 100 points, but the run-up in price in the unrelenting upswing gave significant potential profits. The developing momentum divergence and rounding swing told traders it was time to take profits. The Dow then completed a measured move to the downside.

Whenever you see a chart pattern leap off the page at you, it’s best to catalog it and study it with your own interpretations. Through looking at the past, you can glean clues (but not certainties) of the future.

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