Friday, August 15, 2014

Understanding Sideways Price Action: The Symmetrical Triangle

Home Depot’s (NYSE: HD) Symmetrical Triangle
By Martha Stokes, CMT

Stocks have been trending sideways more often in the past few years as more and more of the institutional orders are automated. With brand-new custom orders for each market participant group, and a wide diversity of trading venues and platforms, the automated order streamlines the routing of orders and makes processing the billions of orders that come in from around the world far more efficient.

There are many types of sideways patterns, and each is unique to a specific market participant group, which can control price in a manner which causes a certain sideways pattern to persist. The symmetrical triangle doesn’t form as much as it used to but, at times, it forms on the broader big blue-chip company stocks that are popular with retail traders and small-lot independent investors.

Most of the time, wide sideways price action is a Trading Range or Range-Bound price action, which is at least 10 points to over 100 points wide on an expensive stock. What happens when a triangle forms is either the upper range or lower range starts to compress, or both compress at the same time, creating the symmetrical triangle. This type of controlled price action is often indicative of larger-lot buyers moving in. Their ability to control price is one of the “footprints” they leave on the stock chart.

HD has a symmetrical triangle which has increased its angle of ascent on the lower side of the price action of the trading range. In this instance, the triangle is forming lower highs and higher lows, compressing from both the upper side and lower side of the trading range. It is most easily seen on a 3-day chart. HD started out with a trading range that had plenty of inconsistent highs and lows and mid-range-level peaks and valleys, which are common in trading ranges and cause problems for traders using Parabolic and Stochastic indicators.

The daily chart provides additional clarity.

The stock is compressing at a faster rate, which is indicative of an impending breakout pattern. Price alone, however, even with all the various price indicators, will not define which direction the breakout will occur. For that analysis, traders must use Quiet Accumulation or other large-lot indicators to expose whether the large lots are on the buy side or sell side of the compressing price action. This is why price indicators and price analysis by itself is insufficient for optimal stock picks in trading.

The speed at which the compression is occurring on both the upper and lower ends of the range is creating more and more pressure for the breakout, which could be either a run or another gap on High Frequency Trading action triggering when HFTs discover what side the Dark Pools are trading.

Sideways action is a critical aspect of technical analysis that must be learned proficiently. There are numerous new sideways patterns that are not taught in the technical analysis books written even a few years ago. The massive structural changes to the stock market are creating new patterns all the time. Being able to see these patterns, without drawing lines eventually, should be the goal of every technical trader. Then, studying where the large lots are dominant will provide the trading direction and breakout.

First, learn to see the compressing triangles, and then study the institutional action.

Trade Wisely,

Martha Stokes CMT

Master Rated Technical Analyst: Decisions Unlimited, Inc.
Instructor & Developer of TechniTrader Stock Market Courses
MetaStock® Partner

© 2014 Decisions Unlimited, Inc. DBA TechniTrader®. All rights reserved.

Disclaimer: All statements are the opinions of TechniTrader, its instructors and/or employees, and are not to be construed as anything more than an opinion. TechniTrader is not a broker or an investment advisor; it is strictly an educational service. There is risk in trading financial assets and derivatives. Due diligence is required for any investment. It should not be assumed that the methods or techniques presented cannot result in losses. Examples presented are for educational purposes only.

No comments: