17 Oct 2017 Continuation Patterns
Prices never go up or down in a straight line for very long. Adverse price movements against the direction of the major trend happen often. A correction in a bull market takes prices sideways to lower and sideways to higher in a bear market. In general, corrections are referred to as continuation patterns because instead of being an indication that the major trend is about to change, they suggest that prices will continue to move in the direction of the major underlying trend.
Seventy-five percent of the time a symmetrical triangle will be a continuation pattern. What keeps the technical analyst honest is the one in four cases in which the symmetrical triangle acts as a reversal pattern. A triangle is formed after four reversals of the major trend have occurred. The location of reversal point 1 is very important. In an up-trend, the highest point will always be the first point in forming the triangle and the lowest point in the down-trend.
Measuring objective: The expected distance prices will travel out of a triangle is a function of the size of the pattern. The height measuring objective is determined by taking the distance from reversal point 2 up or down to the opposite boundary line and apply it to the break out level. The height is always taken at reversal point 2 whether the triangle is found in an up-trend or down-trend. Let’s look at an example:
Example – Anheuser-Busch Inbev (ANH):
On 5 May 2017 ANH made a high of R1,620, point 1. The reversal took the price down to R1,444, point 2. It rallied again to R1,610 in August, point 3, which is lower than point 1. The next reversal took ANH down to R1,515, point 4. The share price turned up again and stayed within the triangle formation until it broke upwards out of the triangle on 28 September where the trader should buy, go long. The measuring objective is R1,771 where profits can be taken.
The right triangle looks similar to the symmetrical triangle except that one of the boundary lines is horizontal. The direction of the breakout is usually through the horizontal line. An ascending right triangle is formed when reversal point 1 and the horizontal line occurs at the top of the graph and when it occurs at the bottom of the graph it is called a descending right triangle. Measuring objective is the same as for symmetrical triangle.
Ascending Right Triangle:
Example – Sanlam:
On 1 March 2005 Sanlam made a high of R13.50, point 1. The price declined to R10.80, point 2. The next rally took the price back to R13.50, point 3, which is equal to the high of point 1. The next reversal took the price to R11.60, point 4. The next rally took the price above the previous highs on 6 December where the trader should buy, go long. The measuring objective of R16.30 was reached on 27 January where profits can be taken.