Descending triangles

The Descending Triangle is part of the family of “continuation” trading patterns. This variation of the Symmetrical Triangle is generally considered to be bearish and is usually found in downtrends. It is visually easy to identify as shown below in the Mayne Group (MAY) daily chart.

This pattern is similar to the ascending triangle in all ways except that the horizontal line, or in practical terms, near enough to horizontal, is the support line and the trend line is down. Some books of technical analysis refer to them as “flat bottom triangles” as the lows of the trading range occur at a near-uniform price while the highs of the trading range, be they intra-day, daily, weekly or longer, become progressively lower.

How they form. Prices drop to a point where they are perceived to be oversold. Tentative buying comes in at the lows, and prices perk up. The higher price however attracts more sellers and prices re-test the old lows. Buyers then once again tentatively re-enter the market. The better prices though, once again attract even more selling. Sellers are now in control and push through the old support “lows’ of this pattern, causing the previous buyers rush in and dump their positions.

As dependable as triangle patterns are, the investor/trader must wait for a reliable break out signal as sometimes the triangle pattern will become a reversal pattern at the extremes.

How to Trade This Pattern

On a break out of the bearish continuation pattern, as shown above in pink, the investor/trader can either short sell the shares, write (sell) naked call options or sell CFDs. They could also buy put options or put warrants. If the stock is already held by the investor/trader, they can write calls against them to earn income on the way down or simply sell the stock and look elsewhere.