Intraday Ascending Triangle Example in DIA

Oct 2, 2008: 10:02 AM CST

On Wednesday, the Dow Jones ETF – the DIA – gave us a good example of an ascending triangle… that brokeout in the opposite direction as expected.  Let’s examine it and learn from its development.

5-Minute Chart DIA:

Generally, an Ascending Triangle is a continuation pattern and has an upwards break-out bias, as strength is thought to be building as evidenced by buyers stepping up to higher levels (higher swing lows) to support prices while overhead resistance remains constant.

However, this is not always the case, and triangles at their core represent a ‘pause’ or consolidation with an uncertain – though expected – ‘ejection’ or break-out point in either direction (though some triangles have built-in bias).

In this case we see the $108.60 level proving to be significant resistance, as the price repeatedly tests this level (even going back to September 30th) and price cannot break above this area – it is confirmed resistance.

The fact that higher swing lows are occurring sets up this consolidation pattern labled an “Ascending Triangle.”

We know from the price principle “Price Alternates Between Range Expansion and Contraction” to expect some sort of break, often close to the apex (convergence point) of the triangle and that is exactly what happened here – with this morning’s overnight gap.

In my experience, it’s better to wait for a price breakout instead of trying to enter inside the triangle.  Why?  In this case, the bias would have been to the upside and you would have entered long and then been trapped in this morning’s gap and downburst in prices and clearly would have been stopped out of the trade.

Stepping aside and waiting for the break, you would have sacrificed initial trade location in return for higher probability of a successful trade – entering short early in the morning.  The overnight gap was roughly $1.00 in DIA terms, meaning there was a reduced probability of a successful morning gap fade trade.

When you see clean or clear patterns you recognize, print them, document them, annotate them, and store them in a notebook for further reference.  The more times you see these patterns, the more able and confidence you will be to act upon them in real-time.

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