What is a Symmetrical Triangle Chart Pattern?

What is a Symmetrical Triangle Chart Pattern?

Posted on August 10, 2015

Canterbury Weekly Update

August 10, 2015

 

Market State 2 (10 Days): Long term: Bullish – Short Term: Bullish/Neutral.

 

Canterbury Volatility Index (CVI): CVI 54 – The market’s volatility actually declined 3 points last week even though the S&P 500 was down 26 points (1.20%). It is more common to see volatility go higher when the market declines. The current low level of volatility, CVI 54, is within the optimal range and is reflective of a highly efficient and low risk market environment.

Source: Bloomberg.

The Overbought/Oversold indicator closed the week at 60% Overbought. Last week’s market decline slightly improved the overbought condition by declining 17% (from 77% Overbought). This indicator remains slightly on the bearish side of neutral.

Market Update:

The S&P 500 chart below, shows a series of price fluctuations where each “swing” in price, high to low is tighter than the previous “swing” and is symmetrical. A Symmetrical Triangle (red trend lines) is one of the most common triangle chart patterns. It is typical for a symmetrical triangle to form with decreasing volatility until the apex of the triangle is reached. A symmetrical triangle does not give an early indication of future price.

 

Watch for two components of a symmetrical triangle breakout: Price and Volume. A decisive breakout, to the upside, will typically be accompanied with an increase in volume and would be bullish. On the other hand, a break to the downside will normally occur on lower volume and is bearish. An increase in volume on the downside break of the triangle pattern would most likely prove to be a false bearish signal and should be followed by a reverse to the upside.

It is important to note that the Portfolio Thermostat does not incorporate “chart patterns” into its algorithms. Chart patterns have a degree of subjectivity which is not allowed in Canterbury’s evidence based models. The above commentary is an example of classical technical analysis and is worthy of monitoring.

 

One of the best “early” indicators of a possible future top is weak market breadth. The breadth of the market’s leadership continues to diminish over the last few weeks. The S&P 1500 Advance/Decline line (number of stocks going up verses down) is getting weaker, versus the S&P 500. Currently about one third of the 1500 stocks are down more than 20% from their highs while about half of the S&P 500 stocks are 10% or more off the highs.

 

Another attempt at breaking the old highs at the S&P 500 2120 and 2130 levels is likely. If breadth of the market doesn’t improve on the next rally and the negative divergence between the S&P 1500 and 500 stocks continues to expand, then any advance should be followed by further weakness would be expected.

 

Bottom Line:

Markets spend more time in sideways trading ranges than they do trending upward. The current environment is a test of investor’s patience. That said we are just experiencing normal market behavior. The large moves occur when most investors least expect which is reflective of the counter intuitive nature of supply and demand.

 

The key to long term investment management success is to limit portfolio declines to normal bull market pullbacks and corrections – regardless of the overall market environment. The upside will take care of itself as long as the portfolio only holds ETFs with the bullish characteristics as defined by the Portfolio Thermostat’s Security States.

 
Canterbury Investment Management: Tom Hardin

More About Tom Hardin

As Chief Investment Officer, Tom has more than 30 years of experience in the investment management industry and has a broad breadth of knowledge. He is known as an innovator, educator and has been revolutionary in the advancements of portfolio and risk management.

Every effort was used to provide accurate data and mathematical calculations to provide, what we believe to be, accurate results. Canterbury Investment Management, LLC, and its principal owners, make no guarantee of completeness or accuracy of data or calculations as well as conclusions of any statistical data or information contained in the simulation illustrated on this page. Past results or performance is in no way a guarantee of future results.