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Wednesday, March 25, 2009

Ascending Triangle in the $DJUSFN

I never dismiss ascending triangles, particularly when they develop over a period of time. They are reliable patterns. Its pure price action creating the triangle and the targets are usually easy to set. When a price continuously bumps up against resistance and has orderly retreat/advance under that resistance, it will form an ascending triangle. What makes this pattern so potentially powerful is that it is easy to recognize and if your running a trading desk how would you react to this pattern? My point is that shorting it at the breakout point poses more risk than one should perhaps be taking.

I have been scalping FAZ within this triangle (kind of a waste of time so far - I win and lose), but after seeing the price action today, I think I'll stop playing with fire. I might even buy FAS on the dip to "e" if it happens.

The "stop" is easy in this case: you place your stop somewhere below point "c" or do a mental stop. But give it a bit of room "e" can overshoot the trend line making you think the triangle failed. Then it reverses hard and shoots over the upper borderline.

This is the pattern the SPX traced in December to break above 920 for a bit.

The ascending triangle target would place it under its next serious resistance and it would mange to close an open chart "breakaway gap" that is still open. Then you could short it and perhaps get a very nice ride back to test the ascending trend line.

But buyer beware, I am not suggesting you buy them banks! But I am showing you the pattern that is developing. Just follow the price action and we can see what comes out of all this. Set your stops accordingly and take profits accordingly like any good trade.
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