Date:07/09/2008 URL: http://www.thehindubusinessline.com/bline/iw/2008/09/07/stories/2008090750370800.htm

Back Tech School: Descending triangles

We resume the discussion on continuation patterns with the descending triangle this week. These are bearish patterns and portend that the security is likely to decline once the pattern terminates.

These patterns mostly occur during a down-trend but they can also be noticed at significant peaks.

Descending triangles are formed when consecutive troughs (at least two) are formed at approximately the same level and the intervening peaks are formed at successively lower levels.

The lower trend-line joining the troughs is horizontal while the upper trend-line, connecting the peaks slopes downward.

The troughs represent the support zone where all the selling is absorbed. The lower peaks reflect the bearish bias since they are formed due to the unwillingness of the buyers to pay higher price.

The pattern is deemed complete when the security moves conclusively below the lower trend-line accompanied by strong volume.

It is frequently observed that the price moves higher to re-test the lower trend-line following the break-out. To derive the target for this pattern, the height from the base to the upper trend-line at the widest part is deducted from the lower trend-line to derive the extent to which it can decline.

Volume action is similar to head and shoulder and other triangle patterns i.e., it contracts as the pattern unfolds and expands during the break-out phase. A descending triangle pattern is apparent in the chart of Bharat Petroleum depicted above.

The stock formed a descending triangle between February and May this year that marked a halt in the down-trend that began from the January peak. Volume expanded as the stock price rose in June to re-test the lower trend-line. The final crash took the stock price way below the projected target of the pattern that was at Rs 278.

The chart of Axis Bank above shows a descending triangle that was formed towards the peak of the structural up-trend.

The consecutively lower peaks denoted the waning of buying interest and would have sent a danger signal to those reading this chart.

The decline following the breach of the lower trend-linewas shallow but after the lower trend-line was re tested in May, there was a steeper decline that dragged the stock to the pattern’s projected target.

— Lokeshwarri S.K.