Extreme Triangulation

Jan 23, 2009: 11:36 PM CST

As I mentioned earlier this morning, the US Equity Indexes are experiencing a strange phenomenon – let’s call it ‘Extreme Triangulation.’ It’s not actually a triangle, but price is being almost entirely contained within the range of the previous day, drawing price to a finely balanced zone. Let’s view this action from multiple sources.

S&P 500 15-min chart:

SP500 January 23

What I wanted to highlight with the S&P 500 is the fact that we’re narrowing each day’s range as we come into balance. I’ve taken the day’s high and low and extended them fully into the next session to show how the highs and lows are compressing and price is staying completely within the prior day’s range. This is an abnormal phenomenon to occur for more than one day.

To be far, Tuesday’s action was quite volatile, but Thursday and Friday – with the exception of one nip outside the range – were both in the previous day’s range. This is telling us that the market is digesting news from all directions and is currently in ‘balance’ between buyers and sellers… and that it is likely to break soon from this balance into a trend move (or directional burst).

Let’s see this same pattern on the NASDAQ, which is showing far more volatility and gaps.

NASDAQ 10 min chart:

January 23 NASDAQ

NASDAQ based traders have had a rough time this week, as price made perfect plunge on Tuesday, did an opening test drive on Wednesday, was quite erratic on Thursday, and made a sustained up-move after a large gap-down on Friday. Just look at the intraday action on the chart – it makes one very confused chart.

Finally, let’s sum up the action with the Russell 2000 and see its symmetrical triangle consolidation pattern forming.

Russell 2000 10-min:

Russell 2000

Again, with one slight nip out, price has contained itself within two converging trendlines that will be forming an apex very soon about the 445 level… which is almost exactly where price is situated currently.

Price cannot stay contained within a triangle forever, and it is expected to break one way or the other (odds favor to the downside but that by no means is guaranteed).

The best play may be to place a sell-short stop around 440 and a buy (long) stop at 450 and join the market once it breaks, with the other side serving as an initial stop. That would be easier than trying to trade within the triangle or predict in which direction price will break.

Keep watching these patterns closely and do a little extra analysis on the weekend. We could have a sustained breakout move on our hands sometime next week.

Corey Rosenbloom
Afraid to Trade.com

Comments

Corey Rosenbloom

Dave's right,

We may be getting lost in the terminology, but it's a style of trading (entry) where you let the market achieve a specific price which triggers action, instead of you having to sit there all day and wait to enter your order once something happens.

A stop is placed where the other entry stop was in the event it turns into a false-break and then you can re-examine if you want to enter again, but you would certainly want to exit at least were a false break to occur.

Corey Rosenbloom

Newbie,

From an edge standpoint, if we are expecting a breakout move, but we don't know (or want to guess) direction, it's best to let the market pull you in.

Not all brokers might offer the capability (all should) but it's essentially a resting market order that triggers when price touches or exceeds the 'buy' or 'sell-short' price. It's just like a stop-loss which triggers once price hits a certain level, only this time it 'drags you into' the position.

newbie

OK, found out, that I CAN buy long-stop, which I wasn't aware of. The thing is called a buy-stop-limit order here. The downside is more problematic since my broker doesn't allow me to go short. Anyway, thank you Corey and Dave for your instructive post and help, I learned a lot.

DaveB

He means place a buy-stop order at 450, so if the market hits that level it triggers your buy order.

If price breaks to the upside you have a buy order triggered at 450. Your downside protection would be a sell-stop order at 440, meaning you get out in the case of a whipsaw move where prices reverse back to the downside.

Same thing in reverse in the opposite scenario. At least that's my understanding.

newbie

sorry, 245 should read 445, 240 is 440 and 250 is 450

newbie

I mean, this is how I understand "the best play": at actual price 245 I expect a fast break either side. So I may want to sell, only if price dives under 240 or to buy when price rockets above 250. So, in the upside case what is meant by "place a buy (long) stop at 450"? At price 245 I cannot possibly give an order to buy, only if price rises above 450, or can I? And then, I "join the market once it (price? market?) breaks, with the other side serving as an initial stop.” What is meant by "the other side serving as an initial stop”? In case of a false break? I'm really in the fog.

Newbie

Corey,

Would you please elaborate on or give an example for:
"The best play may be to place a sell-short stop around 440 and a buy (long) stop at 450 and join the market once it breaks, with the other side serving as an initial stop."
I really don't understand the intention, maybe it's my english.
Thanks!

Corey Rosenbloom

Blues,

It's strange to have this much difference between the major indexes. SPX does look like a rectangle and the NAS is a rectangle if you truncate the two spikes but the RUT looks like a symmetrical triangle.

That's true (about false breaks). It would be devastating but with everyone watching this, a false break might just be likely. In fact, some of the best moves in the market come from one side being totally thrown off balance (stop-losses) after a valid signal. Such is the beauty of money/risk management though.

blues

Actually, wouldn't Russle (and possibly ndx and spx) are in a descending triangle rather then sideway triangle? I had drawn your triangle before Friday. But Friday's open low made me think that this might be a descending triangle? (spx actually look like a sideway rectangle now) Anyhow, rather then placing bet on a breakout, we might have a false first break and then the real break comes later. So for example, we might break above the consolidation area first to clean out all the shorts (short stops) and then dive down. Often first move are fake moves...

Corey Rosenbloom

Reggie,

It's possible but that would be quite devastating. We've already had one bull trap at the start of the year - not sure if the bulls could take another fake-out break to the upside that collapses again like early January.

Of course, it would be devastating on the bears to have a breakout to the downside only to have it be a bear trap.

Perhaps the Fed decision will break the stalemate.