What is a Point & Figure Bullish Triangle?
The P&F Bullish Triangle is a continuation pattern, appearing during a stock's uptrend.
The Bullish Triangle is a buy signal. The pattern takes the form of a compressing range. The width of the range needs to be at least 5 columns. The columns form a series of lower highs and higher lows. The depth of the undulating column swings is a result of coiling price action.
Trendlines may be drawn to mark the boundaries of the Point & Figure Triangle. The pattern is volatile internally and therefore one box boundary breaks are to be expected and normal.
The Point & Figure Bullish Triangle confirms on a Double Top breakout following the tightening range, thereby signifying the uptrend is reasserting.
Similar in appearance, yet a very different outcome, is the Bearish Triangle. The bearish variant forms during a downtrend.
Psychology of the Bullish Triangle pattern
The Bullish Triangle is a continuation pattern that will test the nerves, and patience, of long holders.
Although healthy, the pause in the trend, resulting from the back and forth swings of the triangle, can cause a trader to doubt their belief in the trend extending. As a result, the more nervous traders, exit their longs, missing out on the eventual up trend reassertion. New investors enter the market and they too will eventually encounter a consolidation, such as the triangle, that will test their trade reasoning.
Triangles can be volatile and that will frustrate inexperienced traders. The whip-saw nature of the triangle can cause a novice to switch their trading direction, incurring a series of losses. As a triangle takes shape it is good practice to take a step back and remind oneself that the trend is your friend.
How to Trade a P&F Bullish Triangle?
Through experience, the Point and Figure Bullish Triangle pattern may be anticipated early on. However, long entry should always wait for signal activation. Once confirmed, further technical investigation of the chart is called for.
- The primary price trend for the stock or index must be up. Above a bullish trendline or testing a rising trendline is necessary.
- A consolidation into a 30-week moving average is attractive, bolstering signal confidence.
- Avoid Bullish Triangles in a bear market as the pattern could morph into a Triangle Top.
- Lower down the chart look for other buy signals preceding the Triangle pattern. Successful buy signals over the prior months, to years, will enhance upside conviction.
- A rising relative P&F chart is always desirable. The relative chart should be trending up on a medium to long-term basis. Only consider a weak relative chart when the ratio has successfully found a long-term relative horizontal support shelf.
- The sentiment condition should also be determined. If the triangle pattern formed during a period of bad news-flow, the upside reassertion that follows will be powerful. Short positions build up during the pattern's coiling action on the news story. The shorts will need to cover and that will fuel the rally northwards. The breakout from a compressed range can be explosive and persistent as pent up energy is released.
The Triangle is a healthy continuation pattern. Therefore in a bull market, the pattern is fairly reliable. However, traders need to be prepared for short-term traps in either direction during the pattern's development. For that reason, we always suggest long entry on signal activation.
Where to place a stop-loss?
Initially, place the stop-loss one box beneath the prior column of Os.
Following pattern activation, as the uptrend extends, the stop-loss could be trailed higher to the box beneath the next column of Os (a pull-back). A retreat of Os would be considered complete when a 3 box reversal triggers back to the upside.
How to determine a price target from a Bullish Triangle?
A horizontal count could be used to calculate an upside price objective for the bullish Triangle. That method captures the characteristic width of the triangle pattern. Wider patterns lead to stronger rallies.
Bullish Triangle Explained by Example
Pattern development preceding range breakout
Alphabet (GOOGL) developed a Bullish Triangle beneath the ceiling of a two year range. Over 2018 and 2019 the price traded sideways. Towards the end of 2019 the Triangle tightened. An upside break through the range ceiling followed with pattern activation.
Interaction between a bullish triangle and moving average support
September and October of 2019 saw a Point & Figure Bullish Triangle pattern develop on the price chart of Dover Corp. The apex of the triangle terminated at the 30-week moving average. Moving averages may be used to add confidence in a pattern's success when they cross paths.
Continuation patterns during an uptrend
The Point & Figure Bullish Triangle pattern typically occurs during an up trending phase. They enable a trend to unwind overstretched momentum, prepping the chart for the next up leg. The Texas Instruments P&F chart shows two consecutive Bullish Triangles during the 2019 rally.
Following an overextended X column
The effectiveness of a Triangle pattern during an uptrend is demonstrated in August 2019 on the Church & Dwight chart. The consolidation allowed the trend to pause-for-breath, ahead of an upside resumption to new highs.
Note the Bullish Triangle consolidated into the rising 30-week moving average. A good example of the importance of studying technical interactions. Thereby enhancing the analyst's confidence in a pattern's success.