Dow Forms Symmetrical Triange – Break Ahead?

Aug 1, 2008: 8:48 PM CST

The Dow Jones average appears to be currently in the process of forming a symmetrical triangle at the moment.  What does that mean and what might it mean for the future?

Dow Jones Daily Chart:

We can expect price consolidation following a large volatility move, as we have just witnessed (Dow moving from 13,000 to 10,800 in three months).  Price structure is merely consolidating (digesting) the movement that took place so swiftly without hesitation.

As such, aggressive traders can perhaps trade off the narrowing price extremes of the potential pattern, and conservative traders can wait for the eventual (potential) break of this classic pattern, and trade in the direction of the breakout.

The “measuring implication” or price projection will be in the neighborhood of 1,600 Dow Points, which is roughly equal to the height of the triangle (which is approximate to the first price swing that formed the triangle).  While it’s impossible to know that a triangle is forming on the first or second swing, by the fourth or fifth swing, the pattern ought to be clear to you.

Momentum (oscillator) is also consolidating, right along with price.  Be especially aware if the momentum oscillator breaks its channels (blue) prior to price.  Also, be sure to ignore moving averages in the formation of this pattern – notice how price is absolutely disrespecting the flattened 20 day EMA.

Let’s zoom in a little and view this developing triangle on a smaller timeframe.

Dow Jones 30-minute chart:

This chart also shows good examples of key momentum divergences, including a relatively rare ‘flat-line’ divergence and multi-swing divergence.

If a symmetrical triangle truly is forming, the next expected move would be a test of the upper descending trendline around 11,500 (250 points away).  Should price break 11,250, it would either invalidate the pattern or be the start of the break.  I suspect we’ll at least get a little more upward movement prior to any break, though, as classic technical analysis states that price is expected to break 67% to 75% prior to the apex (meeting point) of the triangle and we’re not there yet.

Continue to watch the volatility measures and indicators, as well as range expansion/contraction indicators (such as standard deviation and Bollinger Bands) for clues of extreme range contraction, and seek to play a breakout when and if it occurs.

3 Comments

3 Responses to “Dow Forms Symmetrical Triange – Break Ahead?”

  1. dave Says:

    Greetings fellow trader. Please explain your comment concerning “price is expected to break 67% to 75% prior to apex”. I will assume you are stating that the price movement will stay within the symetrical triangle and will break the boundries 67 to 75% into the length of the triangle. if this is the case how does one determine where 67 to 75% lies? is is it determined by hindsight, a certain formula? Any information would be be very greatly appreciated.Thanks

  2. Corey Rosenbloom Says:

    Dave,

    Correct – in my experience and in that of classic books on technical analysis, the best triangles don’t break out at the apex (the convergence point of the two sloping trendlines) but just before the apex, often the percentage mentioned above.

    You can easily tell where the apex is going to be by extending your chart to the right and drawing out the trendlines until they converge and then measure about 3/4ths the distance from left to right.

    Patterns are not absolutes, and we still deal in odds and probabilities.

  3. SteveW (RecordPriceBreakout.com) Says:

    hey corey,

    It’s funny how we look at two different time frames, use different indicators, and come to such similar opinions
    (I just started reading yoru blog tonight!). I brought up a weekly chart for looking at the trend, drew in some fibonacci retracesments, and came up with almost exactly the same levels. I am actually looking for the DOW to follow its recent trend of 2 – 3 day relief rallys before continuing the downward trend.

    Let’s see what happens!