Technical Setups – Descending Triangle…. careful

I’ve noticed a lot of my fellow traders have been getting burned on the descending triangle setup….

First, let’s define the bad boy – No need for me come up with my own – here is a clean and easy explanation from Investopedia:

Descending triangle

The descending triangle is the opposite of the ascending triangle in that it gives a bearish signal to chartists, suggesting that the price will trend downward upon completion of the pattern. The descending triangle is constructed with a flat support line and a downward-sloping resistance line.

Similar to the ascending triangle, this pattern is generally considered to be a continuation pattern, as it is preceded by a downward trendline. But again, it can be found in an uptrend.

Figure 3: Descending triangle

The first part of this pattern is the fall to a low that then finds a level of support, which sends the price to a high. The next move is a second test of the previous support level, which again sends the stock higher – but this time to a lower level than the previous move higher. This is repeated until the price is unable to hold the support level and falls below, resuming the downtrend.

This pattern indicates that buyers are trying to take the security higher, but continue to face resistance. After several attempts to push the stock higher, the buyers fade and the sellers overpower them, which sends the price lower.

Now let’s look at some examples of a few stocks that have caused some pain and others I’m watching:

CYTR:  I’ve outlined the descending triangle pattern below. Notice that it did hold support on Friday, but there isn’t anything from MACD of RSI to indicate a reversal back up.  The narrowing  bollinger bands do imply a possible move, soon, but the LIKELY move is down.  If you want to trade this as a bullish opportunity, then be safe and wait for confirmation that this bearish pattern is reversing.  In other words, I would be watching for a move above the top trendline before considering a long pay.. close stops are in order.  I believe that it is a mistake to buy long here in hopes for a horizontal support bounce.  I’m playing it safe – waiting for topside triangle breakout.

ANX: I’ve been telling the bulls family that I love ANX – however, this is a descending triangle, as well. That’s why I don’t own it.  When it breaks out north, I’ll participate.  But, buying now means the possibility of waking up with a stock that has fallen through support significantly. One other warning sing -it fell through SMA50 support.  Why jump in now?

HYTM:  here is an example of a descending triangle that failed. HYTM may eventually be a big winner and run to $1.. it could happen.  However, as a very short term trader, there was no reason for me to be int his stock as it tested horizontal support.  It’s all about risk management.

CDII: Tricky, tricky.  There are two things going on here – 1st: a weak symmetrical triangle (yellow lines).  However, the stronger pattern is the horizontal support along SMA200.   This makes the odds better that will act as a descending triangle, thus falling further.  I do like the chart for possible breakout long, but I didn’t need to own it until it does.  Then I can target 1.9 first target and established stops. 

There’s my sweet and short descending triangle opinions for those who like to play long.  You could also look for descending triangles for short opportunities. Good luck, all, and see you in the Boom Factory tomorrow.



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