P&F Triangles
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Triangles form as prices contract on a P&F chart. The X-Columns (up) form successive lower highs as the O-Columns (down) form successive higher lows. The inability of prices to break from this contracting range reflects a standoff between buying pressure and selling pressure. This standoff is resolved with the next P&F signal. A Double Top Breakout makes the triangle bullish, while a Double Bottom Breakdown makes the triangle bearish.
Triangles have at least five columns. The first four columns form the triangle and the fifth column marks the breakout or breakdown. There are at least two X-Columns with the second column forming a lower high. There are at least two O-Columns with the second column forming a higher low. Triangles can extend more than four columns as long as subsequent X-Columns continue forming lower highs and subsequent O-Columns form a higher low. Triangles are neutral patterns dependent on the breakout or breakdown for the signal.
A Double Top Breakout signals a bullish resolution to the triangle pattern. Note that a trend line break is not enough. A basic P&F buy signal, such as a Double Top Breakout, is required to complete the triangle and trigger the bullish signal.
The chart below shows Chesapeake Energy (CHK) with a triangle forming in 2010. The blue lines outline the triangle. Note that these lines do not appear on the chart; they were added to make the pattern more visible. There were two O-Columns with higher lows and one X-Column with a lower high. This pattern turned bullish with the Double Top Breakout at 25.
The chart below shows the ProShares Ultra QQQ Fund (QLD) with a triangle forming after a sharp advance towards the end of 2010. This triangle represented a consolidation within an uptrend. Even though such consolidations are typically continuation patterns, they depend on a breakout before turning bullish. After a lower high and higher low, the ETF forged a Double Top Breakout to confirm a Bullish Triangle.
A Double Bottom Breakdown signals a bearish resolution to the triangle pattern. Note that a trend line break is not enough. A basic P&F sell signal, such as a Double Bottom Breakdown, is required to complete the triangle and trigger the bearish signal.
The chart below shows Atlas Air (AWWW) with a long X-Column and then a triangle. While this pattern might be viewed as a potentially bullish continuation pattern, the triangle depends on a break for confirmation. After two lower highs and a higher low, the triangle broke to the downside with a Double Bottom Breakdown.
The chart below shows F5 Networks (FFIV) with a long O-Column that forged a Triple Top Breakdown. A consolidation formed after this long column and a triangle evolved. After a higher low and lower high, the stock continued lower with a Double Bottom Breakdown to turn the triangle bearish.
Chartists should also study the chart to assess risk. After an upside breakout, a move below the low of the last O-Column would produce a Double Bottom Breakdown and invalidate a triangle breakout. Chartists should also employ other technical analysis techniques to measure risk and monitor the unfolding trend.
Bullish and Bearish Triangles represent price consolidations that often precede a substantial move. This coiling of prices is similar to the tightening of Bollinger Bands. Volatility declines as the Bands narrow and as a Triangle coils tighter. A volatility contraction is often followed by volatility expansion, which produces the breakout or the breakdown. Short triangles (4 columns) after a sharp advance or decline are more likely to be continuation patterns. Large triangles (6+ columns) are more likely to mark a reversal. Regardless of the bias, a triangle is not confirmed until the Double Bottom Breakdown or Double Top Breakout.
Chartists can use the or the to establish Price Objectives. Price Objectives are not hard targets. Instead, they simply provide a guesstimate for an upside or downside objective.
Thomas Dorsey's examines the basic ideas and key patterns of P&F charts. Dorsey keeps his analysis straightforward; as a relative strength disciple, he devotes a complete chapter to relative strength concepts using P&F charts. These concepts are tied in with market indicators and sector rotation tools to provide investors with all they need to construct a portfolio. Additionally, Dorsey incorporates lessons on how to use P&F charts with ETFs.
