The descending triangle is a bearish continuation pattern that often appears when a stock is about to move lower. The pattern is relatively easy to spot because of its same lows and descending highs. When a stock is exhibiting this pattern, it is a sing of weakness in the stock and therefore it can warn traders of a drop in the near future. Those who are holding the stock may want to sell it and those who know how to short stocks can short the stock.
The chart above shows what a descending triangle looks like. The stock will be making relatively same lows. However, the highs will be declining. This is a sign of weakness because each time the stock tries to rally back up, it makes lower highs. Picture a person trying to throw a basketball and each time he throws the ball, it goes lower.
You can connect the lows with a horizontal line and the declining highs with a downtrendline. The stock will usually breakdown after 2/3 of the triangle pattern. We can consider the stock to breakdown when it goes below the horizontal line.
The horizontal line is actually a support area and when the stock breaks below it, it means that support has been broken. Some traders will short the breakdown and put a stop above the pattern.
In the chart above, AES had a 2 month descending triangle pattern. It broke down in late October 2017 and proceeded to move lower which would have made a great trade.
Some descending triangles are longer in duration and some will be shorter. However, they all have the same features of same lows and declining highs.
The chart above shows AGN with a descending triangle pattern. Notice how the stock made the same lows but it started to make lower highs. The stock broke below the support line and proceeded to move lower.
The chartist can get an initial target for the pattern by taking the height of the pattern and projecting it from the breakdown to get a target. I mention it as an initial target because a stock that is in a downtrend tends to go lower. Traders can often take 1/2 of their position off the table and ride the other half lower. That is sound trade management.
Another thing that will make the odds go in the favor of the short seller is to determine whether the stock is in a downtrend. You can often find that a stock that is below its 20 MA, 50 MA and 200 MA will continue to go even lower because it is in a downtrend.
Sometimes volume can be a very important clue to the pattern. A heavier volume as the stock breaks down is a good sign of a bearish continuation. If you look at the breakdown in AGN above, you will notice that there is slightly heavier volume on the day of the breakdown.
The descending triangle chart pattern is a very reliable chart pattern that signals a bearish continuation. It is fairly easy to spot and if you see it in a stock, do try to take advantage of it by shorting the stock. If you are holding the stock, it makes sense to lighten on the stock a bit.
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