The Hindu Business Line : Tech school: Continuation patterns

After discussing reversal patterns over the past weeks, we now move on to continuation patterns. These chart patterns occur, when the stock stops trending up or down and moves sideways. The sideways price action on the charts is a pause in the existing trend. Termination of the continuation pattern also marks the resumption of the prior trend (that can be either up or down).

Reversal and continuation patterns can be differentiated based on the time consumed. The reversal patterns generally take longer to form and signify major trend changes while continuation patterns take less time and are classified as intermediate patterns.

Triangles, flags, pennants, wedge, rectangle and continuation head and shoulders are some of the continuation patterns. Triangles are classified into three types, symmetrical, ascending and descending. Each type of triangle has a different formation and forecasting implications. To draw most triangles, four reversal points (two peaks and two troughs) are the minimum requirement, while many triangles have six reversal points (tree peaks and three troughs). Symmetric Triangles are continuation patterns shaped by two converging trendlines (the upper line descending and the lower line ascending) along a price range that gets narrow over time-period due to lower tops and higher bottoms. The point of intersection of the two converging trendlines is called the apex.

The symmetrical triangle is also known as a coil. If the trend prior to the formation of the symmetrical triangle is up, then the pattern would have bullish implication and vice versa. The volume should shrink as the price swings narrow within the triangle and it should obviously pick up at the breakout. A break below the lower trendline of the pattern is used by technical traders to signal a move lower, whereas a break above the upper trendline signals the commencement of a move upward. Occasionally a return move will take place back to the penetrated trendline following a breakout. One can see a symmetric triangle formation in the chart of Gammon India shown below. This continuation pattern was followed by the stock continuing further.

Traders could have gone short while this triangle was unfolding to reap profits in the subsequent decline. The stock was on a downtrend from its January high of Rs 845 to its April low of Rs 361. However, the stock found support at around Rs 360 level during April and paused for two months (consolidated sideways). This sideways consolidation shaped into a continuation pattern known as symmetrical triangle. In this scenario, the symmetrical triangle pattern had bearish implication since the prevalent trend was down. During mid July, the stock broke below the lower trendline of the pattern and moved lower.

We also notice a symmetrical triangle pattern in chart of ABB spanning March and April. Following the breach of the down trend line, the stock moved lower.- Yoganand D.

More Stories on : Technical Analysis | Stock Markets

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page