What is a Bearish Triangle Point and Figure pattern?
The P&F Bearish Triangle is a sideways continuation pattern during a bear trend. The formation culminates with a sell signal.
At least five adjacent columns form the triangle. Columns are shallower in depth as the pattern progresses. As a result, the triangle has a coiling symmetrical appearance.
The contracting range eventually breaks out to the downside, reasserting the general downtrend.
Trendlines may be drawn to mark the boundaries of the Bearish Triangle. Failed boundary breaks of one box are frequent given the inherent range volatility. Consequently, trendlines are only rough guides.
Confirmation of the Bearish Triangle is via a Double Bottom breakdown. Downtrend thereby reasserts.
The Bullish Triangle is a mirror image of the Bearish Triangle, albeit to the upside, during a rising trend.
Psychology of the Bearish Triangle Pattern
A trader's patience is tested by the Bearish Triangle pattern. The back and forth swings can last weeks to months. Consequently, the lack of market direction, frustrates. Short positions are often covered prematurely, ahead of the eventual downside resumption. Furthermore, the pattern deceives by nature of the ranging activity. Investors are drawn in, buying the stock, believing a bottom is finally building following the preceding downtrend. However, the eventual downside break immediately forces new investors into losing positions. Long positions caught on the wrong side of the market leads to selling pressure. As a result, an intense downside reassertion follows pattern activation. Leaving little time for traders to act.
How to Trade a P&F Bearish Triangle?
The pattern's slow build up enables the Bearish Triangle Point and Figure development to be anticipated early. The appearance of columns with an ever decreasing height is a big clue. However, the signal should only be followed when the pattern officially confirms via a breakdown. Once confirmed, deeper investigation of the chart is called for. Thereby enhancing signal confidence.
- The primary price trend for the stock, or index, must be down. Essentially, contained in a bear market.
- The pattern's build up should be beneath a bearish trendline plus a key long-term moving average such as the 30-week MA.
- In a bull market, shorting a Bearish Triangle sell signal is best avoided. The probability of failure is just too high.
- A series of successful sell signals preceding the Triangle add downside confidence.
- As always, a bearish relative P&F chart is important when looking to sell a stock. The relative chart, locked in a bear market, is ideal. A weak relative chart equates to underperformance. Consequently, the price chart is more susceptible to successful bearish patterns such as the triangle.
Sentiment during pattern development
The sentiment condition contributes an awful lot to the pattern's final outcome. As the Bearish Triangle Point and Figure pattern builds, look for hopeful news stories. Hope encourages shorts to cover plus draws in new buyers.
Fresh long holders of stock will be trapped at a loss when the pattern activates, increasing supply. The investors sell, fueling the price break lower.
Shorts who were forced out by deceptive sentiment, sell the market again, from a lower price point.
Optimum time to go short?
As soon as the Bearish Triangle activates. Breakdowns from a coiled range are often explosive and persistent. Therefore, a trader should have done their homework (criteria above) ahead of the breakdown. The window for entry is narrow.
Failure Potential of the Bearish Triangle Point & Figure pattern?
The Bearish Triangle sell signal is a continuation pattern. Therefore, in a bear market, fairly reliable following confirmation. However, traders need to anticipate traps in either direction during the pattern's development. For that reason, it is best to wait for final confirmation via the breakdown signal.
Where to place a stop-loss when going short?
Initially, place a stop one box above the prior column of Xs. As the downtrend gathers momentum, the stop-loss could be trailed lower to the box above the next completed column of Xs (dead-cat rally). A 3 box reversal printing back to the downside would suggest completion of the counter-trend bounce.
How to determine a price target?
A horizontal count is the best tool for the job with regards the Bearish Triangle sell signal. This pattern has width and that is a useful variable for viable price targets. That said, remember price objectives are never set in stone, they merely provide a zone to work with. Potential support shelves could provide further clues as to the best time to execute short covering.
Bearish Triangle Explained by Example
Bearish Triangle on a relative ratio chart
During 2018 a Bearish Triangle sell signal formed on the relative ratio between Exxon Mobil and the Dow Industrials. The continuation pattern allowed the trend to pause. Sideways trading enables an oversold condition to be worked off. Once complete, the downtrend reasserts. In this case, to a new 20 year low.
Bearish Triangle with the typical five columns
Alibaba Group traded sideways for much of 2018. August of that year saw confirmation of a Bearish Triangle Point and Figure pattern. Subsequently, the price broke lower, through the floor of the 2018 range. Price action deteriorated into the end of December 2018, hitting a low of $130.
Continuation pattern example
In late 2018, the relative ratio for the SPDR Energy ETF, against the S&P 500, resumed a decade long downtrend. A Bearish Triangle sell signal clued the downside resumption. Underperformance continues to this day. As of October 2019, the ratio sits at an eighteen year low.