Section 5:
Bullish Continuation Patterns
Bullish continuation patterns are the most important price patterns for two reasons. First, individual stocks and the stock market as a whole tend to trend higher. Second, stocks can go 100, 200, or even 10,000 percent higher, but can only go down by 100 percent. The power of exponential growth in stocks is best applied with bullish continuation patterns.
Bullish continuation patterns predict the continuation of existing bullish trends. A prerequisite of bullish continuation patterns, therefore, is a historical bullish trend. Put another way, there needs to be a historical bullish trend before the formation of a bullish continuation pattern. As simple as this may sound, it’s often overlooked by traders new to price patterns.
This goes for trading all price patterns: Always manage risk!
Bullish Triangle
Definition:
A bullish triangle is a symmetrical triangle that forms in the context of a bullish trend. The triangle starts with a big upward move in the stock over a relatively short period of time. This period of time may be weeks for long-term traders or hours for short-term traders.
The stock then proceeds to reverse lower, bounce higher, and continues to do so along converging diagonal support and resistance lines. Both buyers and sellers grow increasingly aggressive in their views, and give the stock less and less room to fluctuate. The converging support and resistance lines meet at the apex of the triangle, at which point the stock generally breaks higher.
Stocks don’t necessarily have to reach the apex of the bullish triangle before breaking. Oftentimes you will see bullish triangles break well in advance of the stock reaching the apex.
Nuance:
The triangle itself is symmetrical and, in fact, neutral in terms of directional bias. It’s only a bullish triangle if it occurs in the context of a bullish trend. It’s very important to independently define the trend of the stock when trading triangles.
Application:
A bullish triangle is confirmed once a stock breaks above the upper-end of the triangle, which is defined by the downward sloping resistance line. A bullish triangle is rejected if the stock breaks down below the lower-end of the triangle, which is defined by the upward sloping support line. A breakdown from a bullish triangle will lead to a period during which a stock trades sideways or starts a new bearish trend and moves lower.
Figure 5.1
Example:
The bullish triangle in shares of Google (GOOG) shown in Figure 5.1 is a perfect example of how a bullish trend must be established before the formation of the triangle. Notice how GOOG trended higher from $200 up to $450 before forming the triangle. The triangle formed after the stock had staged a strong bullish trend.
The triangle took ten months to form. The time that the bullish triangle took to form made this particular pattern more of a long-term trade.
Observe how GOOG traded very near the apex of the triangle before finally breaking above the downward sloping resistance line. The stock went on to trade higher over the next 14 months.