The descending triangle is a bearish formation that usually forms during a downtrend as a continuation pattern. There are instances when descending triangles form as reversal patterns at the end of an uptrend, but they are typically continuation patterns. Regardless of where they form, descending triangles are bearish patterns that indicate distribution.
Because of its shape, the pattern can also be referred to as a right-angle triangle. Two or more comparable lows form a horizontal line at the bottom. Two or more declining peaks form a descending trend line above that converges with the horizontal line as it descends. If both lines were extended right, the descending trend line could act as the hypotenuse of a right triangle. If a perpendicular line were drawn extending up from the left end of the horizontal line, a right triangle would form. Let's examine each individual part of the pattern and then look at an example.
In contrast to the symmetrical triangle, a descending triangle has a definite bearish bias before the actual break. The symmetrical triangle is a neutral formation that relies on the impending breakout to dictate the direction of the next move. For the descending triangle, the horizontal line represents demand that prevents the security from declining past a certain level. It's as if a large buy order has been placed at this level, and it's taking a number of weeks or months to execute, thus preventing the price from declining further. Even though the price doesn't decline past this level, the reaction highs continue to decline. It's these lower highs that indicate increased selling pressure and give the descending triangle its bearish bias.
After recording a lower high just below 60 in Dec-99, Nucor formed a descending triangle early in 2000. In late April, the stock broke support with a gap down, sharp break, and increase in volume to complete the formation.
The descending triangle is a notable technical analysis pattern that indicates a bearish market. It forms during a downtrend as a continuation pattern, characterized by a horizontal line at the bottom formed by comparable lows and a descending trend line at the top formed by declining peaks. The pattern's validity relies on factors such as an established trend, certain properties of the lower horizontal and upper descending trend lines, duration, and volume behavior.
When the pattern's breakout occurs, it's usually indicative of a bearish move. The breakout's direction and price projection, determined by the widest distance of the pattern subtracted from the resistance breakout, can serve as a crucial guideline. However, this target isn’t absolute and should be used with other technical analysis tools.
Last but not least, it's important to note that a descending triangle carries a distinct bearish bias, unlike the symmetrical triangle, which remains neutral until the breakout. This bias is highlighted by the pattern's lower highs, which reflect increasing selling pressure. In short, the descending triangle is an easily recognized pattern that can provide you with valuable insights into an asset’s forthcoming price movements.
As a descending triangle pattern develops, volume usually contracts. An ideal validation of the pattern occurs when there's a downside break with an expansion of volume for confirmation. While an increase in volume at the breakout is preferred as it indicates stronger market conviction, it is not always necessary.
To qualify as a descending triangle, the formation must meet several conditions. There should be an established trend, although the length and duration of the trend isn't as important as the robustness of the formation. At least two reaction lows are needed to form the lower horizontal line and two reaction highs to form the upper descending line, with these highs being successively lower. The duration of the pattern can range from a few weeks to many months, and the volume usually contracts as the pattern develops.
When a breakout from the descending triangle occurs, it's usually a bearish indication. Once the horizontal support line is broken, it turns into resistance. Sometimes there will be a return to this newfound resistance level before a significant downward move begins. The target price post-breakout is calculated by measuring the widest distance of the pattern and subtracting it from the resistance breakout.
You can use descending triangle patterns to anticipate potential price declines. Once the pattern is confirmed by a breakout (ideally accompanied by an increase in volume), this can be a signal to consider selling or shorting the security. The expected target price after the breakout provides a guideline for the potential downside, but it's also important to use other aspects of technical analysis when deciding when to cover a short position or initiate a buy.
After a breakout from a descending triangle, the target price is calculated by measuring the widest distance of the pattern and subtracting it from the breakout point at the resistance line. This provides an estimate of where the price could potentially go, but it's important to remember that this is just a guideline and other technical analysis factors should be taken into account.