by Amanda Harvey
What Is an Ascending Triangle Pattern?
The ascending triangle is generally considered to be a continuation chart pattern, and also a bullish indicator. The horizontal upper edge of the triangle is formed by a resistance level created by a series of equivalent highs, and the ascending lower edge rises towards the resistance level with a series of gradually higher lows. The pattern is completed when the upper edge of the triangle pattern is crossed, and this is usually seen to present indication of a breakout.
When Does An Ascending Triangle Pattern Appear?
This pattern typically forms within an uptrend as acts as a period of consolidation during which prices do not experience further increase. The rising of the lower triangle edge, or the support line, indicates increasing strength of interest among buyers. The pattern generally appears during an uptrend and provides a signal that the trend will continue.
At What Stage Should the Breakout Occur?
The breakout which is indicated by the crossing of the upper triangle line should occur before the lower line meets the upper line, forming a finished triangle. There should still be a gap between the upper and lower lines of roughly one-third of the distance that was present at the start of the pattern when the price breaks above the upper line. If the gap has decreased to the stage where the two lines meet in an apex before the price breaks out, the stock has become somewhat stagnant, and may not present a viable trading opportunity under these conditions.
What Level of Volume Occurs During an Ascending Triangle?
During the formation of the pattern, the volume will generally be contracting as the stock consolidates and the gap between high and low decreases. When the price breaks out, there is usually an increase in volume. This increased volume acts as a confirmation of the continuation pattern; however, it is not always present or necessary.
What Is the Average Duration of this Pattern?
From the onset of formation to the breakout of the pattern, the typical duration is between one and three months. There are some situations where the pattern is completed in less than a month and other instances where it takes many months to reach its culmination.
How Much Increase Is Anticipated at the Breakout?
The commonly accepted method of estimating the predicted increase when a stock breaks out of an ascending-triangle is by using the difference in price which forms the width of the triangle (the gap between upper and lower lines) at the beginning of the pattern. If a stock was moving between $200 and $250 at the start of an ascending triangle pattern, the expected breakout would be a $50 increase, taking the price up to $300.
An Example of an Ascending Triangle Pattern
This example is from a report given by Ian Harvey for Stock Options Made Easy on May 8, 2015.
Like other healthcare sector names, McKesson has been a solid performer in 2015, rallying 7.4% since January, and it appears that MCK looks ready to kick off a second leg higher in May.
McKesson is currently forming an ascending triangle pattern, a bullish price setup that's formed by horizontal resistance above shares (in this case at $231) and uptrending resistance to the downside. Basically, as this health stock bounces in between those two technically important price levels, it's been getting squeezed closer and closer to a breakout above $231 resistance when that happens, we've got a buy signal.
For McKesson, relative strength is the side-indicator to watch right now. The relative strength line has been in an uptrend going all the way back to last summer, an indication that MCK isn't just moving higher, it's also outperforming the rest of the market right now. As long as that uptrend in relative strength remains intact, MCK should keep on beating the S&P.
The ascending triangle pattern is a fairly strong indicator of a bullish continuation in a trend, but like all indicators, should not be used as the sole criteria for trading choices. Confirmation may be provided by volume, as mentioned earlier in this article, and other indicators such as the RSI can be used as side-indicators as suggested by Ian Harvey in the example quoted above.