Tuesday, May 15, 2007

Triangles In The Real World

"Adversity is the state in which man mostly easily becomes acquainted with himself, being especially free of admirers then."

John Wooden

Yesterday's post covered a concept for determining price targets for triangle formations. Sometimes ideas seem so simple on paper but don't hold the test when applied to real world trading. There were two examples used yesterday that were based on longer term weekly/monthly charts. Below is an example from Monday's S&P Futures market.

This is a 5minute chart covering the last two trading days. Yesterday a descending triangle was formed. As this triangle was forming, it was possible to see it setting up as the 1510 level was support and the series of highs were lower. As the price contracted, it was easily possible to see the width of the triangle and estimate the potential of the move once it broke. A descending triangle is usually a bearish triangle, so a bias to the short side was not a stretch. Taking the middle width of the triangle(A-B=X), we have a value of 3.8. The next step is to multiple 3.8 by 1.618 to give us the range to subtract from point B. This will give us our target, 1503.85. This chart above is not made up. This happens more than people think on all sorts of different time frames.


This is a chart of the S&P 500 Index showing the swing levels based on the opening range. This concept was covered under the post Cliffnotes For Offense And Defense. It is important to watch the volume and advance/decline numbers as the market trades through 1500.43 level. If this level is broken with higher volume, the market should drift down to the second swing level 1476.76. This won't happen in one day, but should be the downside target the more time we spend under 1500.43.

It is worth watching how the brokerage stocks(Bear Stearns,Goldman Sachs,Merrill Lynch,Morgan Stanley,Lehman Brothers) trade today. There is talk about junk bond bubbles and Ben Bernanke is speaking today. There are also economic numbers related to inflation being released over the next couple days. A second chart to watch is the Dow Jones Transportation Index. Both could give a heads up to what direction the market is heading. Both charts are below.

NDX 100 Index

NYSE Composite Index

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