Continuation Chart Patterns
Continuation patterns usually indicate that the sideways price action on the chart is nothing more than a pause in the prevailing trend, and that the next move will be in the same direction as the trend that preceded the formation. Continuation patterns are usually shorter term in duation and are more accurately classified as near term or intermediate patterns.The typical continuation patterns are triangle patterns. There are three types of triangles— symmetrical, ascending, and decending.
The symmetrical triangle
The symmetrical triangle shows two converging trendlines, the upper line descending and the lower line ascending. The vertical line at the left, measuring the height of the pattern, is called the base. The point of intersection at the right, where the two lines meet, is called the apex. The symmetrical triangle represents a pause in the existing trend after which the original trend is resumed.
Example of a bullish symmetrical triangle. Notice the converging trendlines. A close outside either trendline complete the pattern. The vertical line at the left is the base. The point at the right where the two lines meet is the apex.
There is a time limit for the resolution of the pattern, and that is at the apex. As a general rule, prices should break out in the direction of the prior trend somewhere between two-thirds to three-quarters of the horizontal width of the triangle.That is, the distance from the vertical base on the left of the pattern to the apex at the far right.
Volume should diminish at the price swings narrow within the triangle. But the volume should pick up noticeably at the penetration of the trendline that completes the pattern. The return move should be on light volume with heavier activity again as the trend resumes. Volume is more important on the upside than on the downside. An increase in volume is essential to the resumption of an uptrend. Even though trading activity diminishes during formation of the pattern, a close inspection of the volume usually gives a clue as to whether the heavier volume is occuring during the upmoves or downmoves. In an uptrend, for example, there should be a slight tendency for volume to be heavier during the bounces and lighter on the price dips.
The ascending triangle
The ascending triangle has a rising lower line with a flat or horizontal upper line. This pattern indicates that buyers are more aggressive than sellers.It is considered a bullish pattern and is usually resolved with a breakout to the upside. The bullish breakout is signaled by a decisive closing above the flat upper trendline. As in the case of all valid upside breakouts, volume should see a noticeable increase on the breakout. A return move back to the flat upper line is not unusual and should take place on light volume.
An ascending triangle. The pattern is completed on a decisive close above the upper line. This breakout should see a sharp increase in volume. That upper resistance line should act as support on subsequent dips after the breakout. The minimum price objective is obtained by measuring the height of the triangle (AB) and projecting that distance upward from the breakout point at C.
The descending triangle
The descending triangle, is just a mirror image of the ascending, has the upper line declining with a flat or horizontal bottom line. It is generally considered a bearish pattern. This pattern indicates that sellers are more aggressive than buyers, and is usually resolved on the downside. The downside signal is registered by a decisive close under the lower trendline, usually on increased volume. a return move sometimes occurs which should encounter resistance at the lower trendline.
A descending triangle. The bearish pattern is completed with a decisive close under the lower flat line. The measuring technique is the height of triangle (AB) projected down from the breakout point at C.