icker with its signals in the case of up-sloping necklines. Moreover, it requires no specified minimum timefor any of its component moves, and no confirmation by another stock or Average.
There are Head-and-Shoulders Bottoms (EN: An undescriptive term for a bottom formation that I wouldprefer to call the “Kilroy Bottom.” See Figure 7.4.) as well as Tops, with equally important implications. TheBottom Formations will be taken up in our next chapter.
Taylor & Francis
Taylor & Francis Group
http://taylorandfrancis.com
chapter seven
Important Reversal Patterns: continued
Head-and-Shoulders (EN: or Kilroy) Bottoms
A formation of the Head-and-Shoulders type may develop at an important Reversal ofTrend from down to up. In that case, it is called a Head-and-Shoulders Bottom, and itsprice pattern (as compared with a Top) is turned upside down, that is, it stands on itshead. EN: The present Editor has always been impatient with the undescriptive natureof the term “Head-and-Shoulders Bottom,” and so he has renamed it the “KilroyBottom.” See Figure 7.4. The volume pattern is somewhat the same (not turned upsidedown) as at a Top but with some important changes in the latter half of the formation,which we shall discuss in detail. We can lay down specifications for it in much thesame words as we used for the Head-and-Shoulders Top. Here they are, with theportions that differ in principle from the Top printed in italics (see Figures 7.1 through7.25):
A. A decline, climaxing a more or less extensive downtrend, on which tradingvolume increases notably, followed by a Minor Recovery, on which volume runsless than it did during the days of final decline and at the Bottom. This is the “leftshoulder.” EN9: Or left hand.
B. Another decline that carries prices below the Bottom of the left shoulder, onwhich activity shows some increase (as compared with the preceding recovery)but usually does not equal the rate attained on the left-shoulder decline, followedby another recovery that carries above the Bottom level of the left shoulder and onwhich activity may pick up, or at any rate exceed that on the recovery from the leftshoulder. This is the “head.” EN9: Or nose.
C. A third decline on decidedly less volume than accompanied the making ofeither the left shoulder or head, which fails to reach the low level of the headbefore another rally starts. This is the “right shoulder.” EN9: Or right hand.
D. Finally, an advance on which activity increases notably, which pushes upthrough the neckline (EN9: Or fenceline) and closes above by an amountapproximately equivalent to 3% of the stock's market price, with a conspicuousburst of activity attending this penetration. This is the “confirmation” or“breakout.”
The essential difference between Top and Bottom Patterns, you can see, lies in theirvolume charts. Activity in Head-and-Shoulders Bottom Formation usually begins toshow uptrend characteristics at the start of the head and always to a detectable degreeon the rally from the head. It is even more marked on the rally from the right shoulder.
It must be present on the penetration of the neckline, or else the breakout is not to berelied on as a decisive confirmation.
An important basic principle of techniques that is involved here merits furtherdiscussion. Wall Street has an old saying that expresses it: “It takes buying to put stocksup, but they can fall of their own weight.” Thus, we trust, and regard as conclusive, anyprice break (by a decisive margin) down through the neckline of a Head-and-ShouldersTop
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....
Hr p-
U
..
LOCKHEED
AIRCRAFT
LK
OCTOBER NOVEMBER DECEMBER JANUARY FEBRUARY MARCH '
I 2 9 16 23 30.6 .13.20-27 4 -11-18 25 1'8 '15 22 29 5 12 19 26: 4 11-18 25
Figure 7.1 After “rounding over” in October 1943 in the last phase of a long declinefrom 41 in 1940, Lockheed made a conspicuous two-month Head-and-ShouldersBottom. Note especially, on the above chart, the volume on the rally in early Decemberand in the first week of January with reference to points B and D on the precedingpages. “LK” dropped back to 15 again in June 1944, and then ran up quickly to 23 byNovember, finally reaching 45 in January 1946. One advantage of logarithmicallyscaled charts is they expand, and thus call attention to important formations thatdevelop at low price levels, and that would be obscured on an arithmetic scale.
even though it occurs on a light turnover, but we do not trust a breakout from a Head-and-Shoulders Bottom unless it is definitely attended by high volume. A low-volumebreakout from a Bottom Pattern may only be premature, to be followed after more“work” around the Bottom levels by a genuine advance, or it may be a “false” moveentirely. It pays generally to wait and see. This same distinction in volume developmentapplies to some of the other Reversal Patterns we shall take up later in this chapter.
Other differences between Top and Bottom Head-and-Shoulders do not involve anynew principles. It can be said that Bottoms are generally longer and flatter, that is, theytake more time in relation to depth of pattern in points than do Tops. This is particularlytrue when they occur at Reversals in the Primary Trend. The overall volume at Bottomstends to be less than at Tops, and the turns tend to be more “rounded.” In theconstruction of a Head-and-Shoulders Top, the activity that goes into the left shoulderusually exceeds that on any preceding rally in the entire uptrend. In a downtrend, on theother hand, there may be Panic Selling in some of the earlier phases of decline, whichruns the volume chart up to a mark higher than any that is subsequently registered inthe final Bottom Formation. None of these differences, however, affects our essentialHead-and-Shoulders specifications.
The measuring implications of the Head-and-Shoulders Bottom are the same in allrespects and are applied in the same way as with Tops. Tendency toward symmetry isagain the rule, with variations as to slope of neckli


rt up to a mark higher than any that is subsequently registered inthe final Bottom Formation. None of these differences, however, affects our essentialHead-and-Shoulders specifications.
The measuring implications of the Head-and-Shoulders Bottom are the same in allrespects and are applied in the same way as with Tops. Tendency toward symmetry isagain the rule, with variations as to slope of neckline, relative size of shoulders aboutthe same as in Tops. Reactions to the neckline following the initial breakout from theBottom type appear in about the same frequency and proportions as do the PullbackRallies, which follow the initial breakdown from the Top type.
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Sales 100's
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DOME MINES
DM
NL
S
S
H
■ '
.Ell
ill.I.lit
-U
—r
■ il.nl, .,111 ill III Illi I Hi 111 i III I ill III
’ A T S ' O ' N ’ D 1 J ’ F ’ M
Figure 7.2 Weekly charts are particularly useful for detecting Major Bottom Reversalsbecause Bottom Formations characteristically take longer to build than Tops. DomeMines made a typical Head-and-Shoulders base, 13 months' long, at its Primary TrendReversal in 1942. Note the volume pattern. (Volume detail, however, is better studiedon daily charts.) Dome's powerful Head-and-Shoulders Bottom was “high” enough tobe conspicuous on an arithmetic monthly chart. It reached 25 in 1944.
Multiple Head-and-Shoulders Patterns
The Head-and-Shoulders Formations we have examined up to this point have been,despite minor variations, relatively simple and clear-cut, consisting of three well-defined elements. We come now to a group of related patterns that carry much the sametechnical significance but have more elements and are much less clearly defined. Theseare the Multiple Head-and-Shoulders Tops and Bottoms, also known as ComplexFormations. We need not take much of our space to define or lay down specificationsfor them, as they may be described quite sufficiently as Head-and-Shoulders Reversalsin which either the shoulders or the head, or both, has been doubled or proliferated intoseveral distinct waves.
Almost any combination is possible, of which only a few can be illustrated in the actualchart examples reproduced in this chapter. Formations of this type appear with fairfrequency at Primary Bottoms and Tops, but more often at Bottoms than at Tops. They
Figure 7.3 With a strong movement toward lower interest rates evident since June, thetiming of the low in “FNM” is not surprising. Neither is the massive width (fromMarch through October) of its evolving pattern, which closely matches that of the huge,complex Inverse Head-and-Shoulders Bottom in Treasury Bills (December 1984),September 25, 1984. Even the slight timing lag is appropriate.
Figure 7.4 EN: At the risk of being considered a comic (actually, a satirist), I suggestthat, although the image is comical, the pattern is more descriptive of theincongruously named “Head-and-Shoulders Bottom” than the present terminology.
Left hand equals left shoulder, right hand equals right shoulder, nose equals head, andneckline equals fence line, or, as easily, neckline. I am teaching all of my students tothink and use these terms, which makes much more sense than the absurd “upside downHead-and-Shoulders Bottom standing on its head.” One hundred years from now, thiscontribution to the nomenclature will be accepted as totally descriptive andappropriate, and the term “Head-and-Shoulders Bottom” will have disappeared fromthe lexicon.
A common form consists of two left shoulders of approximately equal size, a singlehead, and then two right shoulders, again, of approximately even size and balancing thetwo on the left. Another is made up of two heads with two or more shoulders on eitherside. Still another form, of which you will usually find several good examples at anyMajor Market Turn, consists of double shoulders on either side of a head, which isitself composed of a small but quite distinguishable Head-and-Shoulders development.
Figure 7.5 A ragged Kilroy (or, if from the old school, a Head-and-Shoulders) Bottomthat ended the Bear Market (or first phase thereof) of 2001-2002. Some seven and ahalf months in formation it threw a few knuckle balls and curves and looked right up toMarch 2003 as though it were a Bear Market rally. Once the neckline was taken out,there was no arguing with it—it was a real Bottom. It balked at the neckline for acouple of months before becoming a full Bull. Complex economic and political realities
affected the markets: the terrorist attacks of September 11, 2001, which put paid to thetulipomania of the roaring 1990s and the ill-advised tax cuts of the Bush Jr.administration. Using the formula of cut taxes and increase spending to start a war, themarket was sufficiently stimulated to rally exuberantly. The downtrend line is drawnhere and the reader should have no trouble seeing the break of the long-term downtrendas well as the Kilroy Bottom demanded a shifting of gears from Bear to Bull.
Tendency to symmetry
We have mentioned the tendency toward symmetry in the simple Head-and-ShouldersFormation. Patterns of the Multiple or Complex type show an even stronger urgetoward symmetry—so strong, in fact, that it may be counted on in determining tradingpolicy. If there are two shoulders on the left, there are almost always two on the right ofnearly the same size and duration. (One does not know that a Multiple is in the processof formation until its right shoulder becomes evident.) Except in volume, the right-handhalf of the pattern is, in the great majority of cases, an approximate mirror image of theleft.
Necklines on Multiple Head-and-Shoulders Formations are not always easy to drawbecause the reactions between the shoulders and heads may not stop at levels that allfall on a single line. Up-sloping and down-sloping variants seldom appear in this classof patterns; necklines are almost always very close to the horizontal. Sometimes, it ispossible to estimate by simple inspection where the critical li

eBooks\Technical Analysis of Stock Trends, Eleventh Edition-CRC Press (2018).pdf


ecklines on Multiple Head-and-Shoulders Formations are not always easy to drawbecause the reactions between the shoulders and heads may not stop at levels that allfall on a single line. Up-sloping and down-sloping variants seldom appear in this classof patterns; necklines are almost always very close to the horizontal. Sometimes, it ispossible to estimate by simple inspection where the critical line really lies. More often,there are two necklines, an inner and an outer, and no price movement of consequenceis to be expected until the outer has been penetrated (which is simply anotherexpression of that tendency toward symmetry referred to above).
Curiously enough, the “power” of a Multiple Head-and-Shoulders Pattern is more aptto be over rather than underestimated. One might think, in view of the length of timeand

Figure 7.6 “MCA” enjoyed an excellent advance from 1980 to 1986, but the goingbecame increasingly difficult after the turn of the year, when this issue began tochallenge its 1985 high. Although the Bulls did manage to set a new high-water mark inApril, a series of Pullbacks kept this issue well away from any further tests. Indeed, alarge Complex Head-and-Shoulders Top appeared to be unfolding with the MajorNeckline penetrated slightly on the sell-off.
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DECEMBER JANUARY FEBRUARY MARCH APRIL MAY
: 1 8 15 22 29 5 12 19 26 2 9 16 23 2 9 16 23 30 6 13 20 27 4 11 18 25’
Figure 7.7 An “ideal” Multiple Top made by Budd in 1946, with two heads. Observeaccompanying volume. Prices often break away from Complex Formations morereluctantly than from the simple Head-and-Shoulders type. The late-March rally, whichwent back through the old neckline, was greater than normal in that respect, but thegeneral market Averages were pushing to new highs at this time. Repenetration of aneckline does not, of itself, cancel the implications of a Reversal Formation.
Sales
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SIL
RL
G
G
AMERICAN LOCOMOTIVE
LA
1946
APRIL MAY JUNE
AUGUST SEPTEMBER
6 13 20 27 3 10 17 24 31 7 14 21 28
6 13 20 27 4
Figure 7.8 The long Multiple Head-and-Shoulders Top made by American Locomotivein 1946 displays very well the sort of volume pattern—irregular but taking on
definitely Bearish character in its latter half—that is normal to this formation. Therounded Bear Market Rally of August (compare price and volume trends) was unable toattain the old neckline and was stopped at a Resistance (RL) created by earlier Bottomlevels (see Chapter 13). G and G mark Breakaway Gaps that were not “covered” (seeChapter 12).
Figure 7.9 From a Head-and-Shoulders Top in February, Digital plunged sharply lowerinto midJune, retracting roughly two-thirds of the 1983-1985 advance. The summer lowwas the head of a Broad, Complex Head-and-Shoulders (EN: Or Kilroy) Bottom.“DEC,” however, had already enjoyed a high-volume penetration of the neckline andwas, therefore, in a buying position.
ARCHER DANIILS MIDLAND
300
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800
81
82l
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100's I
MARCH APRIL
MAY
JUNE
~ACGU
T SEPTEMBER
OCTOBER NOVEMBER DECEMBER
XD.035
XD.035 5 % STK.
XD.035
Figure 7.10 After testing its 1980 high in mid-1983, “ADM” turned sharply lower,retracing roughly 40% of the 1982-1983 advance by mid-1984. The summer low,however, appeared to be a Bottom. Indeed, if one looked at the volume pattern from
April to November and correlated it with price activity, it was not difficult to make agood case for a Complex Head-and-Shoulders Bottom. A neckline through the closesgave us a go signal on a penetration of 20 5/8.
Figure 7.11 An Intermediate Bottom of the Complex class, abnormal in its lack ofsymmetry but, nonetheless, easy to recognize. Low volume on reactions after the Headwas completed gave the usual (and essential) Bullish Confirmation. The sluggish startof the new trend was a common feature of Multiple Head-and-Shoulder Reversals.
Figure 7.12 The slide in Amdahl occupied the Bears from March to June before a sharprally gave notice that the Bulls were still alive. After that, a choppy sideways tradingrange evolved with Support near the Pullback lows established earlier in the year.Overall, there was a fine symmetry to this chart, including volume, which indicated theprice action from March to September was actually a Broad Head-and-ShouldersBottom. Entry was on a 3% breakout of the neckline with a minimum objective of 193/4.
amount of trading entering into its construction, that it would signal a move (in reversedirection to the trend preceding it) of greater extent than the simple Head-and-Shoulders. Yet, in its immediate consequences, at least, the Complex showsconsistently less power. Minimum measuring rules for the two types of formations arethe same and are applied in the same manner. The difference between the patternsappears in the price action after the minimum has been reached. The first downswingout of a plain Head-and-Shoulders Top, not counting any early Pullback Rally, willfrequently carry out the minimum measuring implications of that pattern quickly andrun well beyond it. From a Multiple Top, the first downswing is often more leisurely,and very seldom does it exceed the bare minimum—a probability well worthremembering when you are dealing with an Intermediate rather than a Primary Top. Ifthe Complex does develop at a turn in the Primary Trend, prices will eventually gomuch farther; however, even then, there is usually a strong recovery (or reaction, in thecase of a Bottom) from the “minimum rule” level.
A leisurely pattern
The volume attending the construction of Multiple Head-and-Shoulders conforms ingeneral to the “laws” we have previously stated and explained for simple Head-and-Shoulders Reversals. During the earlier stages of Multiple Formation development, thevolume chart may show much irregularity with little recognizable pattern, but in thelatter stages, its correspondence with the Head-and-Shoulders Trend should be plainlyseen.
There is something about Multiple Head-a


ulders conforms ingeneral to the “laws” we have previously stated and explained for simple Head-and-Shoulders Reversals. During the earlier stages of Multiple Formation development, thevolume chart may show much irregularity with little recognizable pattern, but in thelatter stages, its correspondence with the Head-and-Shoulders Trend should be plainlyseen.
There is something about Multiple Head-and-Shoulders Patterns that is especiallypleasing to technical chart followers. Due to their symmetrical tendencies, it isfascinating to watch them evolve to completion. Once completed, however, they maytry your patience by their seeming reluctance to “get going” with a new trend. On thataccount, it becomes
10
Sales
100's
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800
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P J
S
S
PUBLIC SERVICE CORP.
OF N. J.
A ’ M :
Li
■J'A'S'O'N'D'J' I'M
Figure 7.13 Another variant of the Head-and-Shoulders within a Major ReversalFormation. The smaller Head-and-Shoulders Pattern was easily overlooked on the dailychart. Moreover, although it was six months long, this pattern in itself did notnecessarily imply Primary Reversal. Although, when it pushed "PJ's" prices up inOctober through the great supply that had been lodged at 12-13 the previous December,something more than a Secondary Advance could obviously be in prospect. An up-move of consequence was not finally signaled, though, until February 1943 when theupper neckline was penetrated and prices closed at 14. Public Service “threw back” to12 in November 1943 (to the old neckline exactly), but then advanced steadily to 30.Study this again when you take up Support and Resistance in Chapter 13. This chartreiterates the point that, whereas Top Formations are often completed in a relativelyshort time, Major Bottoms usually require many months, and call for a great deal ofpatience. Allowing for the greater time needed, however, most Top Patterns have theircounterparts in Bottom Formations.
easy at times to jump to the conclusion that they have “blown out,” that is, produced afalse signal. Actually, except in the matter of extent of move, which we have alreadydiscussed, they are fully as reliable as the plain Head and Shoulders. False moves arerelatively rare with both. And in those extraordinary cases when a Complex Formationdoes go wrong, it still stands, like the plain Head-and-Shoulders, as a warning that thefinal Reversal is near.
Rounding Tops and Bottoms
The Multiple Formations we have just examined are produced by a sort of extension orproliferation of the ordinary Head-and-Shoulders Pattern. Carry this process still furtherand the Complexes merge into our next class of Reversals, known as Rounding Turns.
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14 Sales 100's 125 100
75
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L-ii-’-L
■ ■,
NATIONAL SUPPLY
NS
1946
Uuuilyiil
APRIL
6 13 20 27 4 11 18 25 1 8 15 22 29 6 ' 13 20 27 ' 3 10 17 24 31 7 14 21 28’
Figure 7.14 Still another form the Complex Reversal may take. This can be describedas a Head-and-Shoulders Pattern with two widely separated heads. Study its volumepattern, noting the breakout on June 20 and the subsequent Pullback. Compare it withBethlehem Steel's Bottom Reversal shown in Chapter 12, Figure 12.12.
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Sales 100's
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• il. -fL ..
S " 4 T—• $3
...............
SUM mt? % ■ $|l
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APRIL MAY JUNE ’ JULY * AUGUST SEPTEMBER
■ 6 13 20 27 4 11 18 25’1’8 15’22’29 6 13 20 27 3 10 17 24 31 7 14 21 28
Figure 7.15 Major Top Reversal Patterns in high-priced investment issues arefrequently long and “flat.” The 1946 Top of Phillips Petroleum could be classified aseither a Multiple Head-and-Shoulders or an irregular Rounding Top. An importanttrendline (see Chapter 14) was broken downside in July.
In our first approach to the theory of chart Reversal Patterns, we saw why it takes timeand a considerable volume of trading to swing an established trend in prices from up todown or down to up. In the Head-and-Shoulders type of Reversal, the trend surges,struggles, and attacks again and again before it finally gives up and retreats. During thisstruggle, the balance between the forces of supply and demand fluctuates, often wildly,
AMERICAN & FOREIGN POWER 2d PFD. A
FPD Pr
1945
26
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JULY AUGUST SEPTEMBER OCTOBER NOVEMBER DECEMBE
7 14 21 28 4 11 18
Figure 7.16 The war-end reaction of 1945 in American & Foreign Power 2d Preferred,as well as in many other issues, took the form of a Rounding Bottom. Compare theprice and volume trends. By October 4, the implications were plain to see.
until finally the one overcomes the other. In the Multiple Formations, a similar processgoes on but rather less violently and, over a period of time, the progressive change fromone force to the other becomes clearly apparent.
The Rounding Turn is a much simpler and more logical manifestation of this technicalphenomenon. It pictures simply and plainly a gradual, progressive, and fairlysymmetrical change in the trend direction, produced by a gradual shift in the balance ofpower between buying and selling.
If, for example, the buying has been stronger than the selling for some time past, weknow the result will have been a general upward trend in the price of our stock, asindicated by our pictorial chart record of its trading history. So long as the buyers of thestock remain more anxious, more numerous, more aggressive, and more powerful thanthe sellers, that preceding upward trend will continue. Now, suppose the selling grows alittle stronger while the buying either weakens slightly or remains stationary at itsprevious strength; this slight change in the technical balance will be indicated by aslowing up of the previous advance. As the selling increases in relative power, it willfinally become equal to the buying power, with t


ul thanthe sellers, that preceding upward trend will continue. Now, suppose the selling grows alittle stronger while the buying either weakens slightly or remains stationary at itsprevious strength; this slight change in the technical balance will be indicated by aslowing up of the previous advance. As the selling increases in relative power, it willfinally become equal to the buying power, with the result of the market level neithermoving up nor down but remaining, for a time, quite stationary (except for Minor andinsignificant fluctuations).
Assume the new development continues and the selling pressure grows until it is finallystronger than buying power. Now the balance is moving the other way. There are nowmore sellers than buyers, and the result will be a gradual decline in the marketquotations for the stock. If this change in the balance of power is fairly steady andcontinues to its logical conclusion, we can see, even without the aid of a chart, that ourpicture of the price movement for that stock would be one of a long advancing trendslowly beginning to round off, holding in stationary suspense for a time, and thencommencing a retreat, reversing the previous upward movement into a new andAccelerating Downward Trend.
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5
AMERICAN SAFETY RAZOR ARZ I
IMSgggiiHi
........
1931 ! 1932 1933 11934 .1935 ■'"1936 0937 0938 0939 0 940 [1941 0942 [1943T1944 ,1945 j 1946.
Figure 7.17 Monthly chart on an arithmetic scale. American Safety Razor's 1932 MajorBottom was a Head-and-Shoulders and also its 1936 Bull Top. Its 1942 to 1946 Bull
Market started from a Rounding Bottom nearly two and a half years long. Monthlychart study pays.
Rounding Bottoms are commonly referred to as Bowl or Saucer Patterns. RoundingTops are sometimes called Inverted Bowls. Despite the logic of their construction,neither type appears as frequently as Head-and-Shoulders Formations. RoundingBottoms occur most often in low-priced stocks, in an extended, flat-bottomed form thatusually takes many months to complete. There was a host of such developments during1942 and 1943 among issues selling under $10.00 a share. (It should be noted here that“Saucer” Bottoms of two or three months' duration also appear frequently, one rightafter another, in the charts of low-priced issues during an extended up-movement. Theircharacteristics and denotations will be discussed in the section “Consolidation.”)
Tops of the Rounding type are rare among stocks in the lower and medium-priceranges, but they are found occasionally in the charts of those high-priced commonstocks that command an AA rating among wealthy investors and do not ordinarilyinterest the general public. They also appear frequently in the charts of high-gradepreferred stocks, quite naturally because the demand for their shares reflects chieflytwo factors—supply of funds seeking conservative investment and interest rates—bothof which tend to change very slowly. The speculative appeal that produces wide-swinging price fluctuations is absent in such issues. The same line of reasoningexplains why Rounding Tops almost never develop
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Sales 100's
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1939
Figure 7.18 Monthly chart of Budd Company. Note that 1942 was the first year toproduce a dull Saucer-Shaped Pattern, a Rounding Bottom of Major import. “BF”climbed from below 3 in 1942 to above 26 in 1946.
am
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igl
J
il /
1 !l,li„! iie; X
Zu
Bi liihlll,liili;
30
20
10
Sales
100's
100
50
Figure 7.19 Similar formation in CertainTeed Products, which rose from below 2 in1942 to above 25 in 1946. Study volume, 1940 to 1945. The up-curving type of MajorBull Trend shown on these charts will be discussed in Chapter 15.
in lower priced, speculative common stocks; Bull Markets in those stocks are toppedoff by excited public buying that pays little or no heed to long-range investmentconsiderations.
How Rounding Turns affect trading activity
We have not yet mentioned the volume half of the Rounding Turn picture, which isinteresting, as well as meaningful. In the case of Rounding Bottoms, its pattern isusually as clean-cut and decisive as the price pattern. The first step in the gradualconquest of supply by demand, which produces a Rounding Bottom, appears as alessening in selling pressure. Volume, which has been running high, graduallydecreases. Demand is still timid, but the pressure on it is less; so, while prices still
decline, the pace is slower and the trend curves more and more to the horizontal. At theBottom, with the two forces technically in balance, relatively few transactions arerecorded. Then demand begins to increase, and as the price curve turns up, tradingbecomes more active. Volume accelerates with the trend until often it reaches a sort ofclimactic peak in a few days of almost “vertical” price movement on the chart.
In such formations, the tips of the volume lines at the bottom of the chart, whenconnected, will describe an arc that often roughly parallels the arc formed by the price
20 27 5
J. I. CASE
1932
nninniiiiinunnniiiiiinniiinui.nniuiiiii.iiiiii,,iii.li.^iiihiiniTnin.Hiiiiiiiiit
MARCH APRIL MAY JUNE
12 1 9 26 ' 2 ■ 9 : 1 6 23 30 7 14r21 :2.8'4 31 '18 25 T 2 '
12 19 26: 2
Figure 7.20 A classic example of Rounding Bottom at the Major Trend Reversal of1932. The jump out of line on June 10 and subsequent return to the Saucer Pattern is acommon development in Rounding Bottoms.
“Bowl” above. These patterns, when they occur after an extensive decline, are ofoutstanding importance, for they nearly always denote a change in Primary Trend andan extensive advance yet to come. That advance, however, seldom carries in a“skyrocket” effect, which completes the entire Major Move in a few weeks. On thecontrary, the uptrend that follows the completion of the pattern itself is apt to be slowand subject to frequent interruptions, tiring out the impatient trader, but yieldingeventually a substantial profit.
Let us repeat that trading volume should ebb to an extreme low at the Bottom of aBowl Pattern if its implications ar


kyrocket” effect, which completes the entire Major Move in a few weeks. On thecontrary, the uptrend that follows the completion of the pattern itself is apt to be slowand subject to frequent interruptions, tiring out the impatient trader, but yieldingeventually a substantial profit.
Let us repeat that trading volume should ebb to an extreme low at the Bottom of aBowl Pattern if its implications are to be trusted. After prices have passed dead center,however, and have begun their first gradual climb with as yet only a slight pickup inactivity, something in the nature of a premature breakout may occur. Without warning,a burst of buying may shoot quotations straight up for a day or two. These incidents areby no means rare, but, almost invariably, prices will quickly drop back again into theirformer channel, and the gradual rounding movement is resumed. There is no particulardanger for the trader in these premature bursts, but if he is tempted to jump in on such a
sudden showing of strength, he should realize there probably will still be need forpatience. A classic example of this type of premature break is shown in Figure 7.20.
See Chapter 16 for some very important 2005 rounding bottoms and their consequencesup to 2011.
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GAMEWELL GO.
JANUARY FEBRUARY
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; 8 15 22 29 5 12 19 26 4 11 18 25 1 8 15 22 29 6 13 20 27 3 10 17 24 1
Figure 7.21 An extreme case of Dormant Bottom. There were many days in the firstfour months during which no shares were traded. A “buy” signal appeared on April 26.Note the volume.
Figure 7.22 The March 1935 reaction produced many Rounding Bottoms. This oneverges on the dormant type. The gap (G), a Breakaway through a Resistance Level, wasnot closed until late 1937 (see Chapter 12).
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:-:i :t
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APPLIED MAGNETICS CORP
APM :| C I
Sales
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JUNE
1000
800
600
400
200
Figure 7.23 In a broad trading range (11—17 1/2) during 1988, "APM" turned downfrom Resistance in the summer. The reaction, however, was slow, forming a Saucer-likePattern from July through November on generally Bullish price-volume correlation. Ofparticular note was the fact the low point of the Saucer was above the February low,that is, higher lows were beginning to emerge. The High-Volume Rally through theShort-Term Downtrend Line signaled the start of the next up-leg.
O1 ... .
I1RU
JUNE "JOEY— AUGUST—SEPTEMBER OCTOBER ' NOVEMBER DECEMBER
18 25 2 19 16 23 30 6 13 20 27 3 10 17 24 1 8 15 22 29 5 12 19 26 3 10 17 24 31
The Dormant Bottom variation
One sort of Major Bottom chart picture has been called a Dormant Bottom. Thisvariation relates logically to our Bowl Pattern, being, in effect, an extreme developmentof the "extended, flat-bottomed form" to which we have alluded above. It appearscharacteristically in "thin" stocks, that is, those in which the total number of shares
outstanding or, more particularly, the floating supply of shares is very small. In suchissues, a normal day's turnover may be only two or three hundred shares in an activerising market. Finally, weeks and sometimes months will pass during which no saleswill be registered for days at a time, or only an occasional lot at a figure that fluctuateswithin a fractional range, making the chart appear "flyspecked."
Eventually, there may appear a sudden and usually quite inexplicable flurry of activity.Several hundred shares appear on the tape and prices advance sharply. This "breakoutof dormancy" can be a premature move, such as we have noted in connection withtypical Rounding Bottoms, to be followed by several more weeks of inactivity, or it canbe the first lift in a sort of step-up process with shorter and shorter intervals betweeneach step, until a consistent uptrend finally develops. In any event, it is a signal that weare dealing with an important Accumulation Pattern.
What has happened to form these Dormant Bottoms is easy to guess. With relativelyfew shares outstanding, and only an occasional lot put up for sale "at the market,"investors (perhaps insiders connected with the company) would succeed only inrunning the price up out of reach if they started to bid for the stock. So they simply"hold a basket under it," as the saying goes, quickly picking up anything that is offeredbut never reaching for it,

Figure 7.24 Cray Research, a powerhouse stock for over a decade. Trading at under$1.00 in 1976, it reached 135 3/4 before the late April gap, through the Bottom of aseven-week Diamond, started the decline. However, after the High-Volume Rally inmid-January, “CYR” also managed to form an impressive Rounding Top. The concavevolume pattern, clearly evident after the high-volume decline to Support that followedthe Diamond breakdown, was particularly significant in illuminating this ToppingPattern.
until eventually the tree is shaken clean. Then they may raise their bids a point or so; ifthat seems to bring out a lot of stock for sale, they go back to their waiting tactics.
Volume pattern at Tops
The volume pattern on Rounding Tops is seldom as clearly defined as at Bottoms.Indeed, it is apt to be rather high and irregular throughout the entire rounding-overmovement in prices. Under scrutiny, one can usually see some signs of a change fromBullish to Bearish activity in the Minor Fluctuations after the peak has been passed, butthe volume warnings do not become conspicuous in most cases until the downtrend hasbegun to accelerate toward the vertical.
We know of no measuring formula that can be applied to Rounding Turns (except forthe minimum qualifications we mentioned in connection with Head-and-Shoulders, thatis, they cannot be counted on to produce a greater move than the preceding price swingin the opposite direction), but they almost never deceive. Their implications can beroughly estimated from the magnitude of the trends that led to them and the length oftime they take in the rounding-over process. The Rounding Turns that often appear onweekly and monthly


n connection with Head-and-Shoulders, thatis, they cannot be counted on to produce a greater move than the preceding price swingin the opposite direction), but they almost never deceive. Their implications can beroughly estimated from the magnitude of the trends that led to them and the length oftime they take in the rounding-over process. The Rounding Turns that often appear onweekly and monthly charts, thus, have major import.
This leads us to the general consideration of weekly and monthly chart patterns. Thusfar, we have been speaking in detail of only daily chart developments, but all of theformations we have taken up appear, as well, in the much larger swings into whichdaily movements
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28
26
24
22
NORTHERN INDIANA PUBLIC' SERVICE NI 1984
14
13
11
Sales
100's
ill
^ L , P „ AY JUNE . J ULY
■7 14 21 28 4 11 18 25 3 1017 24 31 7 14 21 28 5 12 19 26 2 9 16 23 30 7 14 21 28 411 18 25 1 8 15 22 29 6 13 XD. 375 XD. 39 XD .39
Figure 7.25 1984. We love the Scalloping tendency of Northern Indiana PublicService. Although it is obviously not a pattern portending rocket-like advance, thetechnical picture brightens with the high-volume breakout through Resistance at chartend.
are condensed on weekly and monthly charts, and with identical significance. Thus,volume record may not be quite so easy to read (climactic activity may occur on oneday of a week and the other days run dull, which would not show at all in the week'stotal figure), but it is less critical and may almost be disregarded. Head-and-ShouldersTops are particularly plentiful on monthly charts and should be accorded due respect. Infact, any clearly defined pattern, which is built to completion on a weekly or monthlychart, is proportionately significant (bearing in mind that “a Reversal must havesomething to reverse”).
Taylor & Francis
Taylor & Francis Group
http://taylorandfrancis.com
chapter eight
Important Reversal Patterns: the Triangles
We come next to an entirely different family of technical patterns, the
Triangles, a group that has not been as well represented on the charts of the
decade of the 1940s as it was during the 1920s and 1930s (EN10: In
plentiful supply in modern markets of the 2000s). Their scarcity in that
decade is regrettable because they are an intriguing lot with excellent profit
potential. Before we examine them in detail, however, a quick review of the
basic theory, which gives meaning and value to technical analysis, may be
appropriate. That theory can be summarized in the following brief
statements (see Figures 8.1 through 8.25).
1. The market value of a security is determined solely by the
interaction of supply and demand.
2. Supply and demand are governed at any given moment by many
hundreds of factors, some rational and some irrational. Information,
opinions, moods, and guesses (shrewd or otherwise) as to the future
combine with blind necessities in this equation. No ordinary man can
hope to grasp and weigh them all, but the market does this
automatically.
3. Disregarding Minor Fluctuations, prices move in trends that persist
for an appreciable length of time.
4. Changes in trend, which represent an important shift in the balance
between supply and demand, however caused, are detectable sooner or
later in the action of the market itself.
By this time, the fact expressed in the italicized words of the last statement
may have begun to raise some misgivings in your mind. The complaint that
the Dow Theory is often “late” has already been discussed. The Reversal
Patterns studied in the two preceding chapters give no certain signal until
after the trend has changed, usually “sooner” as compared with Dow
Theory, but never at the absolute top or bottom price. The man who sells a
stock as soon as, but not until, a Head-and-Shoulders Top has been
completed on its chart may cash in on no more than half of the total decline
from its extreme high to extreme bottom; this is due to the very terms of our
measuring formula, the first half of the decline can have taken place before
the Top Reversal Formation was finally confirmed.
Make up your mind that there is no help for it. Somebody managed to sell
his shares at the very top eighth of a point on the peak of the Head (and
some poor devil bought them). The seller was just plain lucky. His exploit
can be truly compared with a hole-in-one in golf; even a complete duffer
occasionally enjoys that thrill. But the more experienced a player, the better
satisfied he is to land safely on the green and not too far from the cup. The
more experienced an investor, the less concerned he is with getting the last
point, or even the last 10 points, out of his market commitments.
No one can ever be sure at the time that he is selling at the final high. No
rules or methods have ever been devised—or ever will be—to ensure
buying within fractions of the Bottom or selling within fractions of the Top.
Of course, a man can make certain of buying a stock at its absolute low
provided he is prepared to take at that figure every last
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19
18
17 Sales 100's
50
40
30
20
10
HUDSON BAY MINING & SMELTING
HD
111
S O N D '
r F ’M
i
T F ‘ M^A—M: II : A--S 1 O~’~N ; D '
Figure 8.1 A fine Symmetrical Triangle Reversal Formation on a weekly
chart. Upper boundary sloping down from February 1942 recovery high at
21 and lower boundary sloping up from “Pearl Harbor” Bottom at 16 3/8
converge to an apex of about 18 5/8. From this Major Bottom Pattern,
“HD” advanced to 45 in 1946. Note the shrinkage in volume as a pattern
formed and the increase as the price broke out through the Top in October
1942. Breakout came not quite three-quarters of the way over from the first
Top to the apex.
48
44
40
38 Sales 100's 250 200 150 100
50
1946
SEARS, ROEBUCK
_ APRIL MAY JUNE JULY AUGUST SEPTEMBER
6 13 20 27 4 11 18 25 1 8 15 22 29 6 13 20 27 3 10 17 24 31 7 14 21 28’
Figure 8.2 Sears Roebuck made a Symmetrical Triangle Reversal at its Bull
Market Top in 1946, and then it went into another long Triangle that turned


ame not quite three-quarters of the way over from the first
Top to the apex.
48
44
40
38 Sales 100's 250 200 150 100
50
1946
SEARS, ROEBUCK
_ APRIL MAY JUNE JULY AUGUST SEPTEMBER
6 13 20 27 4 11 18 25 1 8 15 22 29 6 13 20 27 3 10 17 24 31 7 14 21 28’
Figure 8.2 Sears Roebuck made a Symmetrical Triangle Reversal at its Bull
Market Top in 1946, and then it went into another long Triangle that turned
out to be a Consolidation rather than Reversal Formation. (Logarithmic
volume scaling minimizes volume variations.) Sell signal was given at 44
1/2 and again at 41. Decline continued to 30 1/2.
80
76
72
68
64
60
56
52 Sales 100's
50
40
30
20
10
S' O 'N ' D 1 J ' F ' M ' A 1 M J 'J 'A » S ' O ' N ' D ' J ' F 'M
Figure 8.3 Johns-Manville's Primary Trend Reversal in 1942 developed out
of a Symmetrical Triangle that also had some aspects of a Head-and-
Shoulders Pattern with a long right shoulder. Although this is a weekly
chart, the volume here is worthy of detailed study in connection with the
price action. “JM” (old stock) advanced more than 100 points in the next
four years.
share offered, even to the entire outstanding issue if necessary. It might, in
theory, require as much as $3.7 billion to “put a bottom” under U.S. Steel at
70 (EN9: ca. 1950s) in case you are tempted.
The reader, who at this point may think we “protest too much,” will see
more excuses for the foregoing remarks when we take up the habits of
Triangles, for these formations are not always indicative of Trend Reversal.
On the contrary, except in certain rather uncommon varieties, they are more
apt to signal what may most conveniently be termed Consolidation,
terminating an up or down move only temporarily and setting the stage for
another strong move in the same direction later on. (Schabacker called such
chart formations “Continuation Patterns.”) The reason for including
Triangles in this section of our studies under the general heading of
Reversal Formations is that they do, at times, develop at periods of Major
Trend change, and those are, by all odds, the periods that are the most
essential for the investor to recognize.
Symmetrical Triangles
The most common form of a Triangle is composed of a series of price
fluctuations, each of which is smaller than its predecessor, each Minor Top
failing to attain the height of the preceding rally, and each Minor Recession
stopping above the level of the preceding Bottom. The result is a sort of
contracting “Dow Line” on the chart—a sideways price area or trading
range whose Top can be more or less accurately defined by a down-slanting
boundary line and whose Bottom can be similarly bounded by an up-
slanting line. This type of Triangle is called a Symmetrical Triangle. If we
wanted to make a more accurate application of the language of geometry,
we might better call it an Acute Triangle because it is not at
Figure 8.4 Logarithmic price scaling on weekly chart emphasizes important
technical developments at low price levels. “DH's” Symmetrical Triangle
Bottom started a Bull Market that reached 57 in 1945. Note the Throwback
to apex of Triangle, not an uncommon development. The apex itself is a
strong Support (see Chapter 13).
all necessary that its Top and Bottom boundaries be of equal length or, in
other words, that they make the same angle with the horizontal axis.
However, there is a very strong tendency in these formations to
approximate the symmetrical form; so, the established name will do well
enough. This pattern is also sometimes referred to as a “Coil.”
While the process of contraction or coiling, which makes up the price action
of the Symmetrical Triangle Pattern, is going on, trading activity exhibits a
diminishing trend, irregularly perhaps, but nevertheless quite noticeably as
time goes on. The converging upper and lower boundary lines of the price
formation come together somewhere out to the right (the future in the time
sense) of the chart, at the apex of our Triangle. As prices work their way
along in narrower and narrower fluctuations toward the apex, volume ebbs
to an abnormally low daily turnover and, if we are dealing with a typical
example, comes the action that first suggested the name “Coil.” Suddenly
and without warning, as though a coil spring had been wound tighter and
tighter and then snapped free, prices break out of their Triangle with a
notable pickup in volume, and leap away in a strong move that tends to
approximate in extent the up or down move that preceded its formation.
There is seldom any clue given on the one chart containing the Triangle to
tell in which direction prices are going to break out of the pattern until that
action finally occurs. Sometimes you can get a pretty good idea of what is
likely to happen by observing what is going on at the same time in the
charts of other stocks (which is an important topic for
28
CUBAN - AMERICAN SUGAR
26
24
1945
22
20
19
18 Sales 100's 125 100
75
50
25
AUGUST
SEPTEMBER OCTOBER NOVEMBER DECEMBER"
7 14 21 28 4 11 18 25 1 8 15 22 29 6 13 20 27'3 10 17 24 1 8 15 22 29 ’
Figure 8.5 Triangles often form as a part of a larger and more important
pattern of some other type. Here a symmetrical figure constitutes the latter
half of a Rounding Turn. Note the premature breakout on October 17, return
to pattern, and then final breakaway on November 8.
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20
19
18
17
16
15
14 Sales 100's 125 100
75
50
25
NATIONAL GYPSUM NG
RY
JUNE
“ FEBRUARY MARCH “ APRIL-----MAY------JUNE--------JULY
i 3 1017 24 3 4047 24 31 7 44 21 28 5~12 1926- 2 : <462338 7 i 14 >2128’
Figure 8.6 Prices in this Symmetrical Triangle squeezed way out into the
apex before erupting. Breakout at that stage is unreliable; above is a fair
sample of the false moves that occur there. Real move was down.
16
15
14
24
22
20
19
18
17
Figure 8.7 Recovery rallies from “Panic” Bottoms are often capped by
Triangles, for those are periods in which doubt and indecision are prevalent.
The doubt in such cases, however, is usually resolved in favor of renewed
decline.


he
apex before erupting. Breakout at that stage is unreliable; above is a fair
sample of the false moves that occur there. Real move was down.
16
15
14
24
22
20
19
18
17
Figure 8.7 Recovery rallies from “Panic” Bottoms are often capped by
Triangles, for those are periods in which doubt and indecision are prevalent.
The doubt in such cases, however, is usually resolved in favor of renewed
decline. “Panic” Bottoms seldom hold. This chart shows a typical
Symmetrical Pattern topping the recovery from the famous Selling Climax
of October 19, 1937. Note Pullback to apex. later discussion). Often,
however, there is nothing to do but wait until the market makes up its mind
which way to go. And “making up its mind” is just what the market seems
to be doing when it builds a Triangle; everything about this pattern appears
to exemplify doubt, vacillation, and stalling until finally a decision is
reached.

Some cautions about Symmetrical Triangles
A compact, clean-cut Triangle is a fascinating picture, but it has its tricky
features. The beginner in technical chart analysis is quite naturally prone to
look for Triangles constantly, and will often think he has detected them
when, in fact, something entirely different is in the process of development.
Remember, it takes 2 points to determine a line. The top boundary line of a
price area cannot be drawn until two Minor Trend Tops have been definitely
established, which means prices must have moved up to and then down
away from both far enough to leave the two peaks standing out clear and
clean on the chart. A bottom boundary line, by the same token, cannot be
drawn until two Minor Trend Bottoms have been definitely established.
Therefore, before you can conclude that a Symmetrical Triangle is building,
you must be able to see four Reversals of Minor Trend. If it comes after an
advance in prices, you must first have a Top, next a Bottom, then a second
Top lower than the first, and finally a second Bottom higher than the first
Bottom (and prices must move up away from the second Bottom before you
can be sure it is a Bottom). Then, and only then, can you draw your
boundary lines and proceed on the assumption you have a Symmetrical
Triangle.
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18
17
16 Sales 100's 125 100
75
50
25
VERTIENTES - CAMAGUEY SUGAR
1946
’ 6 13 20 27 4 11 18 25 18 15 22 29 6 13 20 27 3 10 17 24 31 7 14 21 28
Figure 8.9 The other side of the story—an imposing Symmetrical Triangle
which failed badly, although for the alert and experienced technician, there
were warnings of something amiss in March and April. Eastern Airlines
built, in late 1946 and early 1947, a formation which, so far as price pattern
was concerned, left little to be desired. Prices broke out topside decisively
in late March. A Throwback in April met normal Support at the upper
Triangle boundary, but the subsequent advance fell short, weakened, and
finally broke down, producing an “end run” around the apex. Warnings
referred to were high and irregular volume, particularly on reactions, in
February and March—not characteristic of valid Triangle development—
and failure of prices to push up rapidly and vigorously after the April 14
Throwback.
Figure 8.8 A Major Symmetrical Triangle Top in which prices squeezed out
into the apex and then produced a false move upside (see Figure 8.6).
“VEC,” as a matter of fact, was a bad actor technically, but this particular
breakout would be suspect anyway.
APRIL
EASTERN AIRLINES EAL
24
22
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18
17
16 Sales 100's
J
'■I
4
...A..
NOVEMBERDECEMBER JANUARY
i 9 16 23 30 7 14 21 28 4 11 18 25 1
;EBRUARY MARCH
8 15 22 1 U 8 15 22 2
AUGUST SEPTEMBER
9 16 23 30 6 13 20 27 4
19
18
17
16
15
14
13
12
11
10
9 Sales 100's
50
40
30
20
10
Figure 8.10 A weekly chart. The seventh-month Consolidation area of 1944
—in “NG,” undefinable at first, developed eventually into a typical
Symmetrical Triangle. Two months after the high-volume breakout in
January 1945, prices reacted nearly to apex level and then pushed away
rapidly. Minimum measuring implications of this Triangle were satisfied at
16.
Figure 8.11 A small Symmetrical Triangle that tended toward the
“Ascending” type. Note that the higher volume that developed within this
pattern in early January came on a rally. This sort of action is fairly typical
of very “thin” stocks.
AMERICAN BANK NOTE
ABN
Figure 8.12 An Ascending Triangle 10 months long, which was the start of
a Major Bull Trend, carrying “ABN” to 45. Refusal of prices to react to the
lower pattern boundary, as here in August 1942, is a frequent development
in strong formations, a warning of near completion and breakout.
38
Sales
100's
1946
CELANESE CORPORATION CZ
Jlll.iliiiliilLilnliillil.llil. lllliyihiliiillLliUliii
JANUARY FEBRUARY^ MARCH ~ APRIL _ MAY JUNE
6 13 20 27 3 10 17 24 3 10 17 24 31 7 14 21 28’ 5 12 19 26 2 9 16 23 30'
Figure 8.13 Premature breakouts from Right-Angle Triangles, such as
appeared in Celanese in March 1946, are temporarily disappointing to the
trader who buys on them, but they eventually work out all right. Celanese,
before its 1946 split, was subject to frequent and peculiar shakeouts, as here
on March 9 and 26.
26
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22
20
19
18
17
16
15
Sales 100's
50
40
30
20
10
BRIGGS MANUFACTURING CO.
ik
M2 J ' J A sjo'nj d;j’ F ’M
Life.
S' O ' N ' D~'~J
JliUi
T"
1 Hil'L
1 ]l •n
j r:**
Figure 8.14 A steep recovery from a Panic Bottom (the “Pearl Harbor”
selling) flattened out into a fine Ascending Triangle. Note the horizontal
Supply Line at 19, above a gradually rising Demand Line. The breakout at
the end of September signaled initiation of an advance of some
consequence. It turned out to be a Primary Bull Market, which took Briggs
up to 53.
112
SEARS ROEBUCK
104
96
88
80
76 Sales 100's 125 150
25
50
25
OCTOBER NOVEMBER DECEMBER 'JANUARY FEBRUARY
MARCH
Figure 8.15 Sears' 1936 Bull Market Top was a Symmetrical Triangle, out
of which it declined 15 points. An Ascending Triangle then produced an
Intermediate Recovery to the Supply Zone (see Chapter 13) at the


quence. It turned out to be a Primary Bull Market, which took Briggs
up to 53.
112
SEARS ROEBUCK
104
96
88
80
76 Sales 100's 125 150
25
50
25
OCTOBER NOVEMBER DECEMBER 'JANUARY FEBRUARY
MARCH
Figure 8.15 Sears' 1936 Bull Market Top was a Symmetrical Triangle, out
of which it declined 15 points. An Ascending Triangle then produced an
Intermediate Recovery to the Supply Zone (see Chapter 13) at the lower
side of the top Triangle. Compare this chart with the 1946 Top in Figure
8.2.
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36
34
32
30
28
26
24
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20 Sales 100's
50
40
30
20
10
SOUTHERN RAILWAY PFD.
APRIL MAY JUNE JULY AUGUST
: 4 :11 18 25 2 9 16 23 30 6 13 20 27 4 11 18 2^ 1 ' 8 15'23 29 '
1936
Figure 8.16 An Ascending Triangle at an Intermediate Bottom. This chart
runs from April through August 1936. Extreme shrinkage in trading volume
during this formation indicated a very strong technical situation.
Another point to remember—and one that does not conform at all to the
“Coil” simile— is the farther out into the apex of the Triangle prices push
without bursting its boundaries, the less force or power the pattern seems to
have. Instead of building up more pressure, it begins to lose its efficacy
after a certain stage. The best moves (up or down) seem to ensue when
prices break out decisively at a point somewhere between half and three-
quarters of the horizontal distance from the base (left-hand end) to the apex.
If prices continue to move “sideways” in narrower and narrower
fluctuations from day to day after the three-quarter mark is passed, they are
quite apt to keep right on to the apex and beyond in a dull drift or ripple that
leaves the chart analyst completely at sea. The best thing to do in such cases
is go away and look for something more promising elsewhere in your chart
book.
A third tricky point is that it becomes necessary sometimes to redraw one or
both boundaries of a Triangle before it is finally completed (i.e., before
prices break out and move away from it in a decisive fashion). This can
happen, for example, when, after the first two Rally Tops have established a
down-slanting upper boundary line, the third rally starting from the lower
boundary pushes up and through the original Top line by a moderate
19
18
17
16
15
14
13
12
11 Sales 100's
ARMOUR & COMPANY
MARCH
AUGUST SEPTEMBEROCTOBER
NOVEMBER DEC'E.mBeRJANI ARY FEBRUAR
Figure 8.17 One of the early 1947 disappointments (to the Bulls) was the
failure of “AM” to break out topside from the long Ascending Triangle
depicted above. Here is a case where supply at 15 finally overwhelmed
demand. A pattern such as this indicates a potentially strong underlying
situation for the long pull. Ordinarily, the consequence of an Ascending
Triangle's “failure” of this sort is the development either of an extended
Rectangular base within the general range of the Triangle (in this case, 10 to
15), or formation of a Double Bottom at or near the earlier low (in this case
near 10). However, “AM” dropped lower after several more attempts to
overcome the Major Supply at the 15 level, which was not substantially
penetrated until 1955.
margin and then, without developing a recognizable breakout volume on
this move, stops short of surpassing the highest level of the preceding
(second) pattern Top. When prices subsequently drop back again into
pattern, it is necessary to abandon the original upper boundary line and
draw a new one across the highs of the first and third rally tops.
How prices break out of a Symmetrical Triangle
Prices may move out of a Symmetrical Triangle either up or down. There is
seldom, if ever, as said above, any clue as to direction until the move has
actually started, that is, until prices have broken out of their triangular “area
of doubt” in decisive fashion. In a very general way, the precepts laid down
for breakouts from Head-and-Shoulders Formations apply here as well. For
example, the margin by which prices should close beyond the pattern lines
is the same, roughly 3%. It is equally essential that an upside break in prices
be confirmed by a marked increase in trading volume; lacking volume, do
not trust the price achievement. But a downside breakout, again as in the
case of the Head-and-Shoulders, does not require confirmation by a pickup
in activity. As a matter of record, volume does visibly increase in most
cases, but in a majority of down breaks, it does not do so to any notable
extent until after prices have fallen below the level of the last preceding
Minor Bottom within the Triangle, which, as you can see, may be several
points lower than the boundary line at the place (date) of the actual
breakout.
The curious fact is a downside breakout from a Symmetrical Triangle
attended to right from the start by conspicuously heavy volume is much
more apt to be a false signal rather than the start of a genuine downtrend
that will be worth following. This is particularly true if the break occurs
after prices have worked their way well out into the apex of the Triangle; a
high volume crack then frequently—we might even say usually—develops
into
12
11
10
9
8
7
6 Sales 100's 125 100
75
50
25
SOCONY-VACUUM OIL
i
' J ' A ' S ■ O ' N ' •D'1 T IM
1
S : O ' N 1 D ' J ‘M 1 M ’ A r M ; J
Figure 8.18 The 1942 Bear Market Bottom in Socony-Vacuum was an
unusual Head-and-Shoulders Formation, with the head consisting of an
Ascending Triangle. Note the increase in volume on the breakout from the
Triangle in July and again on the break through Head-and-Shoulders
neckline in October.
a two- or three-day “shakeout,” which quickly reverses itself and is
followed by a genuine move in the up direction.
All of the above the reader will have undoubtedly found most
disconcerting. Here is a pretty technical pattern, and it cannot always be
trusted. Unfortunately, Symmetrical Triangles are subject to false moves to
a far greater extent than the Head-and-Shoulders Formation or any of the
other formations we have discussed or will discuss later. Unfortunately,
some of these false moves can


p direction.
All of the above the reader will have undoubtedly found most
disconcerting. Here is a pretty technical pattern, and it cannot always be
trusted. Unfortunately, Symmetrical Triangles are subject to false moves to
a far greater extent than the Head-and-Shoulders Formation or any of the
other formations we have discussed or will discuss later. Unfortunately,
some of these false moves cannot be identified as such until after a
commitment has been risked (although good trading tactics should prevent
their occasioning much more than a trivial loss). Unfortunately again, even
a typical shakeout, such described in the preceding paragraph, may produce
a double cross, proceeding right on down in a genuine decline. No technical
chart formation is 100% reliable and, of all our present subject, is the worst
offender.
But most Symmetrical Triangles—lacking an actual statistical count, our
experience would suggest more than two-thirds of them—behave
themselves properly, produce no false signals that cannot be spotted before
any damage is done. Upside breakouts on high volume may be premature in
the sense that prices return to pattern and do some more “work” there
before the genuine uptrend gets under way, but they seldom are false. We
shall have a little more to say about false signals in this chapter and more
later on that we trust will be helpful in developing the experience a trader
needs to defend himself against them.
125
100
75
50
25
Sales
100's
BATH IRON WORKS
ilk
JUNE
: I
JANUARY FEBRUARY MARCH APRIL MAY " JUNE
5 12 19 26 2 9 16 23 2 9 16 23 30 6 13 20 2^ '4 11 18 25 1 8 15 22 29
Figure 8.19 Due to a dividend of $1.00 went ex on March 14, the lower
boundary of this Descending Triangle Top in “BIW” had to be dropped 1
point from 33 and redrawn at 32. Despite the added leeway thus afforded,
however, the original pattern implications were quickly carried out. Prices
pulled back three times to the new lower boundary line of this Triangle on
April 4, April 16, and May 31—unusual, but explained by the existence of a
strong general market uptrend during this period. Whenever a stock goes
ex-dividend during the formation of an Area Pattern of any type, the lines
bounding that pattern should immediately be adjusted to the new value by
lowering them a distance corresponding to the amount of the dividend.
A typical Triangle development
The several actual chart examples of Symmetrical Triangles that illustrate
this chapter will serve, we trust, to give the reader a working acquaintance
with their appearance in various manifestations. Yet it may help to clear up
some of the more important points if we describe in detail just how a typical
pattern develops step by step. Let us suppose you are watching a stock on
your charts that has climbed, with only the normal, brief hesitations and
inconsequential reactions, from around 20 to 30, 32, 35, and is still moving
up. (Let's hope you bought it at 20!) Lower down, its turnover ran between
300 and 600 shares daily, but now, above 30, it has attracted quite a
following, and daily volume has increased to around 1,000. As it
approaches 40, activity shoots up to nearly 2,000 shares, the market
“churns” between 39 and 40, and then prices begin to drop. As they fall
back, you (especially if you own the stock) watch it with some concern, but
you know it is hardly likely that it is going to go straight down again to 20;
stocks do not act that way. (EN9: Sometimes they do now, in the twenty-first
century.) If the trend of this issue has actually been reversed, it should,
nevertheless, spend some more time and effort around its top levels and
make some sort of a Distribution Pattern.
REVERE COPPER & BRASS
1946
20
19
18
Sales 100's 125 100
75
50
25
....... APR I L .......... M AY " * J UNE H J ULY AUGUST "S EPTEMBER
6 13 20 27 4 11 18 25 1 8 15 22 29 6 13 20 27 3 10 17 24 31 7 14 21 28’
Figure 8.20 On the basis of “fundamentals,” Revere was an attractive
holding in 1946, which may account for its reluctance to “give up” when
the market generally started downhill in earnest in June of that year. Its
fluctuations from mid-May to late August constructed a fine, large
Descending Triangle, in which, however, Bearish Volume Signals had
already appeared in late June and on July 23. The breakout came (with a
wide Breakaway Gap) on August 27. Prices clung to the edge of the pattern
for four days and then collapsed. The small formations outlined in April and
May are Flags, to be discussed in Chapter 11.
The decline continues for 10 days with the turnover also declining quite
appreciably. By the time prices have worked back to 33, volume is running
at about 700 shares daily. At 33, it may pick up again for a single day to 800
or 900 shares, but the reaction stops there, and after a day or two, prices
begin to climb again with little change in their turnover rate. In eight or nine
days, quotations have gotten back into the upper 30s and activity increases
and reaches, say, 1,200 shares on the day 39 is reached. Instead of going on
to 40 or beyond, however, a new reaction sets in and prices drift back to 37.
(Perhaps you will find this growing picture easier to visualize if you pencil
its development on a scrap of chart paper.) Now it is evident that a second
Top has formed at 39; you can now draw a tentative pattern line (there are
other names for this, as we shall see later) on your chart across the two
extreme high ranges (not closing prices), which will slant downward from
left to right. So far you have only one Bottom point, so you cannot draw
lines from that, but this second decline brings out even less trading activity
than the first. Volume ebbs to 400 shares and the down move halts at 34; the
price track “rounds out” and turns up again; trading is very dull, but it
begins to pick up as 36 is reached.
This action defines a second Minor Bottom and now you can draw a
Bottom “tangent,” an up-slanting line across the extreme low prices
registered on the two reactions, th


ecline brings out even less trading activity
than the first. Volume ebbs to 400 shares and the down move halts at 34; the
price track “rounds out” and turns up again; trading is very dull, but it
begins to pick up as 36 is reached.
This action defines a second Minor Bottom and now you can draw a
Bottom “tangent,” an up-slanting line across the extreme low prices
registered on the two reactions, the first at 33 and the second at 34. Your
two pattern lines will converge, meeting near the 36H
Figure 8.21 The 1937 Bull Market Top in Westinghouse was this
Descending Triangle, which started in January and broke on February 15.
Prices hung at the lower edge of the Triangle for four days, fell away, and
then pulled back to its lower line on March 4 at the time when the general
market Averages were making their final Bull highs.
level about four weeks ahead (i.e., to the right) on your chart. You have a
Symmetrical Triangle—but you do not know whether prices are going to
fall out of it eventually or shake off present doubts and push up in a new
advance worth following. You can only watch further developments very
closely and be prepared to take whatever action is, in due time, indicated.
The second rally picks up a little in activity, attains a daily turnover of about
700 shares, and pushes up to 38 and on for part of a day to 38 3/4. This
nudges through the previously drawn pattern line by perhaps a quarter of a
point (because each swing is shorter in points traveled and, accordingly, in
duration). But the volume on this Minor Penetration is less than on the
preceding Top (at 39) and buying again ebbs. As the price range line falls
back to 37 and 36, draw a new upper tangent across the first Top at 40 and
the last Top at 38%. There is the suggestion here in this slight “lift” that the
balance may be swinging slightly to the demand side, but do not count on it.
Pinpoint accuracy is not to be expected; Triangles must be allowed some
leeway.
On the third reaction, activity dwindles away to the lowest yet. The up-
slanting Bottom boundary will be reached at about the 35 level, if prices
continue their present course. It is worth noting now whether they will
come all the way down to it this time because if they do not—if their
recession is halted half a point or so above it—that action would give some
significance to the previous bulge through the upper boundary. But this
does not happen; the drift continues right on down to 35, and now volume is
running at the rate of only 200 shares daily, less than it ran in the early
stages of the original advance above 20. This is a critical spot. The price
track flattens out momentarily, turns up feebly, yet keeps hitching
Figure 8.22 A series of Triangles, Symmetrical and Descending, which
evolved during the 1929-1932 Bear Market in Hudson Motors. Note that at
no time during this decline did anything resembling a Major Bottom appear.
Note also how each Triangle's measuring implications were carried out
before any temporary halt or consequential rally developed. Follow your
daily charts for the proper timing of your trading operations but keep an eye
always on the long-range pictures that evolve on weekly and monthly
projections, so as to maintain your perspective on the Major Trend.
up, crosses 36%, picks up activity, reaches the (new) upper Triangle
boundary at 37% and, on the next day, punches through on a turnover of
1,500 shares to close at 39%. This is a breakout; the doubt is resolved and
(barring a false move, unlikely at this point) the trend is once again up.
Note that it was not necessary for prices to surpass the previous high at 40
to produce this signal—that is one of the interesting things about
Symmetrical Triangles.

Figure 8.23 The curious, and in its early stages confusing, Major Bottom
Formation that American Rolling Mills constructed in 1941-1943. The
recovery from the “Pearl Harbor Panic” of 1941 ran into a large
Symmetrical Triangle that broke out on the downside in April 1942. The
subsequent decline satisfied the measuring requirements of that Triangle,
but it did not carry below the December low. The rally of June and reaction
of August-September built the whole area out into another and larger
Symmetrical Triangle, out of which prices broke on the upside in
September. Then the reaction to the apex of the latter, in December 1942,
and the following advance built up into a 15-month Ascending Triangle,
which constituted the final Major Bottom for a trend that carried prices up
eventually to 42 in 1946. The low volume on the June and August-
September reactions, the increase on the October markup, and, even more,
the January 1943 rise and breakout in February were unmistakably of Major
Bullish implications. It takes time, remember, to build a foundation for a
Bull Market.
Reversal or Consolidation
We started to discuss Symmetrical Triangles as Reversal Patterns, yet our
example has turned out to be, instead, a Consolidation Pattern, that is, only
a sort of resting stage in a continued uptrend. Well, three out of four of these
formations will turn out to be just that; the fourth is the dangerous one (if
you own the stock). How would it differ?
The example described might have been a Reversal instead of a
Consolidation Formation any time up to the point of the decisive
breakthrough to 39. If it had been a typical Reversal, the first change
probably would have appeared shortly after the final rally started up from
the third Bottom at 35. That rally would have petered out at about 36%, and
prices would have started to drift back again. Then, with the activity
increasing slightly, the Bottom boundary would be penetrated. As
quotations dropped to 34, daily volume might mount to 600 or 700 shares.
Any further decline would constitute a down signal, resulting in a further
pickup in turnover and an acceleration in the price decline as the stop-loss
orders (to be discussed later) spotted under 34 were “touched off.”
Before we leave our typical examp


activity
increasing slightly, the Bottom boundary would be penetrated. As
quotations dropped to 34, daily volume might mount to 600 or 700 shares.
Any further decline would constitute a down signal, resulting in a further
pickup in turnover and an acceleration in the price decline as the stop-loss
orders (to be discussed later) spotted under 34 were “touched off.”
Before we leave our typical example, we might make some mention of the
post-breakout reactions or Pullbacks that sometimes occur. As in the case of
the Head-and-Shoulders
36
34
32
30
28
26
24
22
20
19
18
17
16
15
14
13
Sales 100's 250 200 150 100
50
GOODRICH ( B. F. ) COMPANY
lull
-L
L X
~F ‘ M 1 AM J
LU
'J'A'S'O'N'D'J’F'M
A
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Figure 8.24 A beautifully compact Ascending Triangle that turned out to be
the Major Bear-to-Bull Reversal in Goodrich in 1942. The breakout from
this pattern (in April) was not signaled by any extraordinary pickup in
activity so far as this weekly record shows (but remember significant
volume detail is often hard to see in a weekly plotting). The Triangle's
measuring implications were carried out by the first upswing, which
reached 18)4 at the end of May. Supply had to be absorbed in the 18 to 21
range (refer to this chart when you study Support and Resistance in Chapter
13), but a Major Up Signal was given in September when prices erupted
through that zone with a conspicuous increase in trading volume.
Formation, the initial breakout move from a Symmetrical Triangle may halt
before prices are carried very far away from the pattern and be followed by
a Minor Reaction, usually lasting only two or three days, which will carry
quotations back to the nearest pattern boundary. Thus, in our first example
in which the break, when it came, took our stock up through the top side to
39/, the next day might have seen a push on to 40, and then prices might
have backed off again in a couple of days of decreased activity to 37% or
38. The up-move would then normally be resumed with greater vigor.
Downside breakouts are sometimes followed in much the same manner by
pullbacks to the lower boundary
ebay Inc-(Nasdaq NM) 57.75 0.240 0.417%
-
X
A
/ T
r w
— --4—
-3 w
n i
ill 1998-2003 Prophet Financial Systems, Inc. I Terms of use apply.
Volume (Millions)
i J . . 1 11
ILJ!
02 Apr Jul Oct 03 Apr Jul Oct
63
57
51
45
42
39
36
33
30
27
24
125
100
75
50
25
0
Figure 8.25 A real-time chart from prophet.net. The volume blowout in July
2002 drew attention to eBay and the sloping line was drawn at that time.
Although the lines are sloppy and the pattern is ragged, it looked at the time
like a Descending Triangle with all its implications. Nevertheless, when it
broke out of the pattern on emphatic volume in October 2003 the
handwriting was on the wall. eBay was for real. So, what's for real? It could
really make money, not just capture free eyeballs, like its internet brethren
and sistern. It actually performed a service of economic benefit to many
people, unlike the internet fantasy follies. See Figure 10.26 for a longer
perspective on eBay. Lessons for the attentive: power of trendlines; alarm-
clock nature of unusual volume; not believing any forecast. Forecast in this
case would have been for a downtrend if, as it seemed, the pattern was a
descending triangle.
of the pattern, after which the decline is resumed with an increase in
volume. However, these post-breakout reactions occur less often with
Triangles than they do with Head-and-Shoulders Patterns.
Another matter we might take up before going on to study the next
formation is the rationale of the Symmetrical Triangle. It may help to fix its
characteristics in mind if we try to deduce what sequence of events might
typically produce it. Of course, any effort of this sort can result only in a
gross oversimplification, which will not fit all of the Triangle's various
manifestations, but it is an interesting mental speculation—and one not
without benefit to our understanding of the general theory of chart
formations. Let us turn back again to our typical example. We started with a
stock that ran up rather steadily from around 20 to 40 and then reacted. It is
fairly obvious what happened at 40: many investors had substantial paper
profits, approaching 100% at that price. (A “round figure” such as 40, 50,
75, or 100 is apt to become a sort of mental profit objective and, hence,
bring in increased selling.) Some of them were ready to cash in and did so,
temporarily swinging the technical balance from demand to supply; they
sold less freely, of course, as prices receded. Other would-be investors had
been attracted to the stock, but too late to “get aboard” below 30. Unwilling
to “chase” it up to 40, they welcomed the reaction and, by the time prices
had dropped back to 33, enough of them were ready to buy to swing the
balance back again to the demand side of the equation.
Watching the ensuing rally, however, were the owners of the stock who had
failed to grab their profits near 40 on the previous advance and had made up
their minds to be a little less greedy if given a second opportunity. Their
offerings began to come in above 37, say, and were sufficiently copious at
39 to stem the advance at that level. Behind the scenes, we can imagine this
process repeated again and again, with new money constantly coming in
and meeting supply from owners increasingly anxious to cinch their profits.
Eventually, the offerings of the latter are all absorbed, or perhaps
withdrawn, and then professionals, as well as hopeful investors, suddenly
discover there is no stock ahead on the books and rush to buy results.
Since the advance (or decline) that follows the completion of a Symmetrical
Triangle usually runs to worthwhile trading proportions (we shall discuss
measuring implications later), there would be an evident advantage to the
trader who could tell in advance of the breakout which way prices were
going to move. The odds are, as already stated, the new move will proceed
in the same direc


buy results.
Since the advance (or decline) that follows the completion of a Symmetrical
Triangle usually runs to worthwhile trading proportions (we shall discuss
measuring implications later), there would be an evident advantage to the
trader who could tell in advance of the breakout which way prices were
going to move. The odds are, as already stated, the new move will proceed
in the same direction as the one before the Triangle's formation. These odds
are greatest, of course, in the early stages of either a Primary Bull or Bear
Market with the chances of Reversal increasing as those Major Trends
mature. Nevertheless, the charts of other stocks often furnish valuable
collateral evidence; thus, if at the same time you detect a Symmetrical
Triangle in the process of formation in “PDQ,” a majority of your charts are
showing Saucers or Head-and-Shoulders Bottoms or Ascending Triangles
or some other pattern of typically Bullish import, it is a fair assumption that
your Symmetrical Triangle will break out topside. There are times when
advance indications of this sort are strong enough to justify taking a
position on it.
The Right-Angle Triangles
We mentioned Ascending Triangles in the preceding paragraph. The
Ascending and Descending are the Bullish and Bearish manifestations,
respectively, of our next class of patterns, the Right-Angle Triangles. In
many respects, in most in fact, they perform like their Symmetrical cousins,
but with this very gratifying difference: they give advance notice of their
intentions. Hence, their names, for the supposition always is that prices will
ascend out of the Ascending form and descend from the Descending form.
The Symmetrical Triangles, as we have seen, are constructed of a series of
successively narrower price fluctuations that can be approximately bounded
across their Tops by a down-sloping line and across their Bottoms by an up-
sloping line. Right-Angle Triangles are distinguished by the fact that one of
their boundaries is practically horizontal, whereas the other slants toward it.
If the top line is horizontal and the bottom line slopes up to meet it
somewhere out to the right of the chart (at the apex), the Triangle is of the
Ascending persuasion. If the bottom line is horizontal and the top line
slopes down, the Triangle is Descending.
These formations are perfectly logical and easy to explain. The Ascending
Triangle, for instance, pictures in the simplest and most normal form what
happens when a growing demand for a certain stock meets a large block of
shares for sale at a fixed price. If the demand continues, the supply being
distributed at that price will eventually be entirely absorbed by new owners
looking for still higher levels, and prices will then advance rapidly. A
typical Ascending Pattern starts to develop in much the same way as the
“ideal” Symmetrical Triangle previously described, with an advance in our
certain stock from 20 to 40 at which point sufficient supply suddenly
appears on the market to fill the orders of all buyers and produce a reaction.
Sensing the temporary satiation of demand, some owners may dump their
holdings on the decline, but offerings are soon exhausted as prices drop
back to, say, 34, and renewed demand then stimulates a new rally. This runs
into supply again at 40, and again, all buyers are accommodated at that
level. The second recession, however, carries quotation down only to 36
before another up-move develops. But the pool or inside group that is
distributing at 40 still has some of its holdings left to sell, so it may take
more time, another backing away and another attack at the 40 line before
the supply there is exhausted and the trend can push along up.
A planned distribution
This type of market action evidences a planned campaign by owners of a
fairly large quantity of shares to liquidate at a predetermined price. It
contains little of the element of doubt that we mentioned as characterizing
the Symmetrical Pattern. So long as demand persists, the distributing pool
knows it can ultimately cash in its entire line at 40 and need not sell for less.
It is equally apparent, so long as demand keeps coming in at higher and
higher levels that, once the supply at 40 has all been absorbed, the market
will advance rapidly and easily. As soon as prices break out above 40, those
who took over the supply at that figure will feel their judgment has been
vindicated and will not be disposed to sell until they, in turn, can register a
good profit.
The crux of the matter is contained in the two preceding sentences. Demand
must continue to come in at higher and higher levels, otherwise, our
formation will cease to be an Ascending Triangle. Plus, the overhead supply
must eventually be absorbed, permitting an upside breakout. If demand
begins to falter any time before the Supply Line (horizontal Top boundary)
has been broken through, the ensuing reaction may drop prices down “out
of pattern,” and then the chart technician is faced with the necessity of
revising his chart picture. One might think that such a development,
blasting the earlier promise of the chart, would occur fairly often, but, as a
matter of experience, it is surprisingly rare. We say “surprisingly” because it
is obvious that in many cases of Ascending Triangle development, the
group selling creates its Top boundary or Supply Line must believe that
level to be just about as high as the stock has any right to go. As holders of
a large enough block to influence the market for several weeks, sometimes
months, their judgment is hardly to be scorned. Yet, once it becomes
evident the lower boundary or Demand Line is slanting up, the odds are
certainly somewhere in the neighborhood of 9-1 that the new buyers will
eventually have the best of it.
On occasion, the third reaction or fourth reaction within an Ascending
Triangle Formation will break down through the previously established up-
slanting Demand Line (lower boundary), but it will be halted at the same
le


omes
evident the lower boundary or Demand Line is slanting up, the odds are
certainly somewhere in the neighborhood of 9-1 that the new buyers will
eventually have the best of it.
On occasion, the third reaction or fourth reaction within an Ascending
Triangle Formation will break down through the previously established up-
slanting Demand Line (lower boundary), but it will be halted at the same
level as the previous reaction. The pattern from there on is apt to develop as
a Rectangle, a formation to be discussed in our next chapter, and should be
treated as such. (The tactics of trading on Ascending and Descending
Triangles, including protection against the rare cases of collapse, will be
taken up in Section II.)
Descending Triangles
Descending Triangles have a horizontal lower boundary or Demand Line
and a downsloping upper boundary or Supply Line. It is evident they are
created by reverse market conditions than those of the Ascending Pattern;
however, their implications are equally strong and their failures equally
rare. Development of a Descending Formation hinges on a campaign by a
group or syndicate (often an investment trust) (EN9: or Mutual Fund or a
takeover group) to acquire a large block of shares in a certain company at a
predetermined price below the market. Their orders are placed and allowed
to stand until executed at that level. If the successive rallies therefrom,
which their buying generates, are stifled by new supplies of stock for sale at
lower and lower levels (thus creating the typical Descending picture on the
chart), orders to buy are eventually all filled and quotations break through
and on down. The mere breaking of the critical line, which many traders
have seen function as a support under the market for a more or less
extended period, often shakes the confidence of holders who had not
previously considered selling. Their offerings now come on the market and
accelerate the decline.
Volume characteristics same as the Symmetrical type
The volume section of the Right-Angle Triangle's chart requires little
comment. It will ordinarily present a picture practically identical with that
accompanying the development of a Symmetrical Triangle. Activity tends
to lessen as prices move out toward the apex. In the Ascending Formation,
there will usually be a pickup on each rally and an ebb in turnover on each
decline within the pattern; in the Descending Formation, the opposite is
true, but sometimes it is not quite so evident. These Minor fluctuations do
not affect the overall diminishing trend of volume until the breakout point is
reached.
As to breakouts, practically everything discussed about the Symmetrical
Triangle will apply as well to the Right-Angle type. Upside breakouts (from
an Ascending Pattern, of course) are attended by a conspicuous increase in
trading volume; if not, they should be treated as suspect. Downside
breakouts (from Descending Patterns) may not evince much of a pickup in
activity, but turnover usually speeds up the second or third day out of
pattern. Throwback reactions to the pattern's boundary line after a breakout
are fairly common; their occurrence seems to depend largely on general
market conditions. Thus, if prices break down out of a Descending Triangle
in an individual stock at a time when the rest of the market is firm, a
Pullback Rally is fairly certain to intervene before any extensive further
decline takes place.
This chart, and a number that have preceded it, illustrate an important point
for the market technician that may well be restated here: When a large
number of individual issues, after an extensive advance, make well-defined
Reversal Patterns of plainly Bearish import, break down out of them, and
then succeed only in pulling back no farther than their lower boundaries or
“Resistance Lines” at a time when the Averages are going on up to new
highs, the whole market is in a dangerous condition and a Major Downturn
is imminent. Divergences of this particular sort between many important
issues and the Averages seldom develop at Intermediate Turns. The warning
is particularly pointed when stocks of the caliber of Westinghouse, DuPont,
General Motors, and others fail to “confirm” new highs in the Averages.
Refer back to Figures 6.3, 6.6, 6.9, and 8.15, for example, and compare the
“timing” in those with the trend of the Averages for the same periods. The
Saucer-Like Reaction Pattern of October to January in the above chart
analyzes into a Complex Head-and-Shoulders Consolidation, a formation
that will be taken up in Chapter 11.
Incidentally, “WX” continued on down to 130 in April 1937, made a
Rectangle base there, and recovered to 158 (see above Descending
Triangle) in August and then fell to 88 in November. Compare this daily
chart with the monthly chart of “WX” for 1935 to 1938 in Figure 15.15.
Good, reliable breakouts from Right-Angle Triangles usually occur at about
the same stage of pattern completion as they do in Symmetrical Triangles.
The earlier the breakout, the less apt it is to be a false move (although false
moves from Right-Angle Formations are considerably rarer, it should be
noted, than from Symmetrical). In those infrequent cases when prices
“squeeze” right on out of the apex without producing a definite breakout,
the pattern seems to lose much of its power.
Measuring implications of Triangles
In Chapter 6, we stated a minimum measuring rule to apply to price
movements developing from a Head-and-Shoulders Formation, and we can
lay down a somewhat similar rule for Triangles—one that applies to both
the Symmetrical and the Right-Angle species. The method of deriving the
Triangle formula is not easy to explain in words, but the reader can
familiarize himself with it quickly by studying its application on several of
the actual examples that illustrate this chapter. Assuming we are dealing
with an up-movement (upside breakout), draw from the Top of the first rally
that initiated the pattern (in other words, from its upper le


Angle species. The method of deriving the
Triangle formula is not easy to explain in words, but the reader can
familiarize himself with it quickly by studying its application on several of
the actual examples that illustrate this chapter. Assuming we are dealing
with an up-movement (upside breakout), draw from the Top of the first rally
that initiated the pattern (in other words, from its upper left-hand corner) a
line parallel to the Bottom boundary. This line will slope up away from the
pattern to the right. Prices may be expected to climb until they reach this
line. Also, as a rule, they will climb, following their breakout from the
pattern, at about the same angle or rate as characterized their trend before
entering the pattern. This principle permits us to arrive at an approximate
time and level for them to attain the measuring line. The same rules apply
(but measuring down, of course, from the lower left corner) to a descending
move.
Although application of the above formula does afford a fair estimate of the
extent of move to be expected from a Triangle, it is neither as definite nor
as reliable as the Head-and-Shoulders formula. Do not forget the important
qualification that the Triangle has somehow lost a part of its potential
strength if the breakout is delayed until prices are crowded into the apex.
Triangles on weekly and monthly charts
We have seen in preceding studies how Head-and-Shoulders Formations
may appear on the long-range (weekly or monthly) charts and will have
importance commensurate with their size. Triangles also may develop on
weekly charts with their implications usually clear and dependable, but the
coarse Triangular Patterns—which can be found on graphs of monthly price
ranges, especially the great, loose convergences that take years to complete
— had better be dismissed as without useful significance.
Other Triangular formations
There are other patterns of price consolidation or congestion that can be
bounded by converging lines and might, therefore, be classified as
Triangles. However, they deviate from the true Triangles of this chapter so
markedly in one or more important respects that they are best treated under
other headings elsewhere, such as Flags, Pennants, and Wedges. Still
another group of chart patterns develops between diverging boundary lines,
on which account they have sometimes been called Inverted Triangles. But
their causes, characteristics, and forecasting implications are so radically
different that we have chosen to rename them Broadening Formations and
discuss them in a later chapter.
The reader may have become dismayed at this point by our frequent
recourse to such qualifying adverbs as usually, ordinarily, and the like. It
cannot be avoided if one wishes to present a true picture of what actually
happens. No two chart patterns are ever precisely alike; no two market
trends develop in quite the same way. History repeats itself in the stock
market, but never exactly. Nevertheless, the investor who familiarizes
himself with the historical pattern, with the normal market action, and
refuses to be tempted into a commitment in the belief that “this time will be
different,” will be far and away ahead of the fellow who looks for the
exception rather than the rule.
The beginner is proverbially lucky. He will find Triangles, Head-and-
Shoulders, or other significant patterns, one after the other, on his charts,
watch them develop, and see them carry through with profitable moves
according to rule, until the exception comes along—or he will overlook the
larger picture while concentrating on some Minor Pattern development—
and suddenly awake to the fact he is caught in a very bad play. Hence, we
constantly emphasize the nonconforming movements. Our words of
qualification are necessary because technical analysis of market action is
not an exact science and never will be.
Taylor & Francis
Taylor & Francis Group
http://taylorandfrancis.com
chapter nine
More important Reversal Patterns
The Rectangles, Double and Triple Tops
The Triangular Price Formations, which we examined in Chapter 8, can be either Reversal or ConsolidationPatterns. In the case of the Right-Angle Triangles, we know as soon as they have attained recognizable form inwhich direction the trend will (or should) proceed. With the Symmetrical Triangles, we have no way of knowingwhether they point up or down until prices finally break away from them, although the odds are, as we have seen,the previous trend will be continued rather than reversed. In this respect, and in many others, our next class oftechnical formations, the Rectangles, resemble the Symmetrical Triangles. There are, in fact, so many points ofsimilarity between them that we can forego any long and detailed discussion. (For illustrations in this chapter, seeFigures 9.1 through 9.18.)
A Rectangle consists of a series of sideways price fluctuations, a “trading area,” as it is sometimes called, whichcan be bounded both top and bottom by horizontal lines. A glance at any one of the examples that illustrate thesepages will show how it got its name. On rare occasions, you may discover a chart pattern whose upper and lowerboundary lines are parallel but either slightly down-sloping or up-sloping. So long as their departure from thehorizontal is trivial, they may be treated as Rectangles. You will also find, on occasion, patterns whose boundaries,while nearly horizontal, tend somewhat to converge. These may be considered Rectangles or SymmetricalTriangles; it does not matter which because the “prognosis” will be the same in either case.
If you will give a quick mental review also to the Head-and-Shoulders, the Complex, and the Rounding types offormations, you will see how, if you disregard the volume part of their charts, any one of these patterns mightmerge or grade into a Rectangle. As a matter of fact, however, you will seldom be left in doubt as to properclassification because the circumstances of trading, the type of buying a