A Descending Continuation Triangle (Classic Pattern) is considered a bearish signal, indicating that the current downtrend may continue.
A Descending Continuation Triangle features two converging trendlines. The bottom trendline is horizontal and the top trend line slopes downward. The pattern illustrates lows occurring at a constant price level, with highs moving constantly lower. The pattern displays two highs touching the upper trendline and two lows touching the lower trend line.
This pattern is confirmed when the price breaks out of the triangle formation to close below the lower trendline.
Volume is an important factor to consider. Typically, volume follows a reliable pattern: volume should diminish as the price swings back and forth between an increasingly narrow range of highs and lows. However, when the breakout occurs, there should be a noticeable increase in volume. If this volume picture is not clear, investors should be cautious about decisions made based on this pattern.
Following are important characteristics of this pattern.
Occurrence of a Breakout
Technical analysts pay close attention to how long the Triangle takes to develop to its apex. The general rule is that prices should break out – clearly penetrate the lower trendline – somewhere between three-quarters and two-thirds of the horizontal width of the formation. The breakout, in other words, should occur well before the pattern reaches the apex of the Triangle. The closer the breakout occurs to the apex the less reliable the formation.
The Triangle is a relatively short-term pattern. It may take from one to three months to form.
Shape of Descending Continuation Triangle
The horizontal bottom trendline need not be completely horizontal.
Investors should see volume decreasing as the pattern progresses toward the apex of the Triangle. At breakout, however, there should be a noticeable increase in volume.
Duration of Pattern
Consider the duration of the pattern and its relationship to your trading time horizons. The duration of the pattern is considered to be an indicator of the duration of the influence of this pattern. The longer the pattern the longer it will take for the price to reach its target. The shorter the pattern the sooner the price moves. If you are considering a short-term trading opportunity, look for a pattern with a short duration. If you are considering a longer-term trading opportunity, look for a pattern with a longer duration.
The target price provides an important indication about the potential price move that this pattern indicates. Consider whether the target price for this pattern is sufficient to provide adequate returns after your costs (such as commissions) have been taken into account. A good rule of thumb is that the target price must indicate a potential return of greater than 5% before a pattern should be considered useful. However, you must consider the current price and the volume of shares you intend to trade. Also, check that the target price has not already been achieved.
The inbound trend is an important characteristic of the pattern. A shallow inbound trend may indicate a period of consolidation before the price move indicated by the pattern begins. Look for an inbound trend that is longer than the duration of the pattern. A good rule of thumb is that the inbound trend should be at least 2 times the duration of the pattern.
Criteria that Support
Look for a region of support at the bottom trendline and a line of resistance at the highest high of the Descending Continuation Triangle.
Compare prices to the 200 days Moving Average. When prices are close to or touch the 200-day Moving Average this signal is considered stronger.
A strong volume spike on the day of the pattern confirmation is a strong indicator in support of the potential for this pattern. The volume spike should be significantly above the average of the volume for the duration of the pattern. In addition, the volume during the duration of the pattern should be declining on average.
Criteria that Refute
No Volume Spike on Breakout
The lack of a volume spike on the day of the pattern confirmation is an indication that this pattern may not be reliable. In addition, if the volume has remained constant, or was increasing, over the duration of the pattern, then this pattern should be considered less reliable.
Short Inbound Trend
An inbound trend that is significantly shorter than the pattern duration is an indication that this pattern should be considered less reliable.
This pattern with its increasingly lower highs and constant lows indicates that sellers are more aggressive than buyers.