The descending triangle is a bearish continuation pattern. It is a variation of the symmetrical triangle.
It differs from the symmetrical triangle in forecasting implication that the symmetrical triangle is inherently neutral. In studying the symmetrical triangle the analyst can assume that the previous trend (either uptrend or downtrend) will continue.
It's formation signals that a market is entering a consolidation phase until it gathers enough steam and shoots off the roof.
A Bearish Descending Triangle
In the figure above, the upper trendline represented by a line that passes through points 2-4-6 is descending. The lower trendline represented by a line that passes through points 1-3-5 is flat. These two lines converge at a point O called an apex.
A base represented by a vertical line that passes through points 1-B measures the height of the triangle.
The following requirements must be met in order to classify a pattern formation as the descending triangle.
As the pattern formation progresses forward towards the apex, the time is running out for price to emerge out from its cocoon of consolidation. Prices must shoot down in the downtrend direction.
If prices continue to remain in consolidation for a long time and beyond apex then the pattern loses its significance.
A downside penetration of the lower trendline represented by line 1-3-5 is essential for the completion of the descending triangle formation.
The geometric shapes of the triangle furnishes significant price and time information creating a strategic advantage to a skilled technical analyst.
The two converging trendlines represented by line 1-3-5 and 2-4-6 provides boundary for price. In order for pattern formation completion, price must shoot down in the downtrend direction prior to reaching an apex at point O.
Usually the breakout in the downtrend direction should occur somwehere between two-thirds to three-quarters of the horizontal width of the triangle represented by line that passes through 1-3-5-Q-O.
As the triangle formation progressess, prices consolidate in a narrow bandwith formed between the lower trendline and the upper trendline. Hence, during this period volume gradually diminishes.
As the price break out in the downtrend direction, the volume bar should rise. Unlike in the case of ascending triangle where significant increase in volume was necessary followed by breakout, price tends to fall out of gravity in the case of bearish descending triangle.
Usually the price return near to the apex just to met resistance at the apex. The return move should occur on lighter volume.
However, the volume should again rise as the price climbs down lower.
For the descending triangle, downside projection potential can be carried out in the following way.
First measure the height of the line B1 and and project that height as the downside potential from the point of breakout.
In the figure above, the point Q is where the breakout occurred. So line QP is the projection of the line B1.
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