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Expanding Triangle

Apr. 08, 2011 4:52 PM ET
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Seeking Alpha Analyst Since 2008

As feared;  a triangle is the high probability scenario when the over-extended 3rd for Compq and the extended 3rds for Dow and Spx got retraced by more than 61.8% last Monday.  

A 1-2-3 that morphed into an a-b-c with the c-wave extended is the earliest indication of triangulation (see Friday's "At Wit's End" for the Compq 5min chart and how to analyze such an occurence of an over-extended 3rd wave).

SnP500 is now a high probability Expanding Triangle:

-   img40.imagefra.me/i548/aarc/155w_a61_ubk...

The e:3 may not be complete yet and the triangle may still expand further or the whole pattern may morph into a combination Triangle and Flat or Zigzag or whatever the markets will decide later.   A Vertical Thrust is needed to confirm the Triangle has already completed.

There is a 127.2% Fibo Extension Major Resistance at 1370 which in many cases would act as the reversal resistance of a 1-2-3-4-5 rally.

I will be unloading most, if not all, my Swing Trade holdings next week.  The 5th wave on intraday should be able to reach the minimum required target of 1354 for the 5th wave on the daily chart (that has started since late August 2010).  Will just daytrade or scalp trade if the Earnings Season proves within or above expectations.

-   img40.imagefra.me/i53t/aarc/141u_790_ubk...

Also bought new YM positions in the afternoon at 12,274 (bought the 1-min divergence buy as Intrepid Trade) and 12,281 (bought the pullback after the 1min chart produced a new momo high) when SnP500 was testing the 79% fibo retrace support of 1324.11.  The afternoon sell-off is expected well in advance since traders are too afraid to hold positions over the weekend while the Gov't Shutdown Fiasco is still un-resolved. 

-   img40.imagefra.me/i548/aarc/155w_ce8_ubk...

Above chart is for illustration only.  Reward vs. Risk very high when the 'Falling Knife' method is used for the 60min Expanding Triangle buy entry.

An expanding triangle seldom happens. It happens when there is an extreme confusion among the traders over a prolonged period of time. 

Chasing a potential Vertical Thrust is extremely hard.  It has one characteristic tho;  the pullbacks on every leg up (or down in case of breakdown thrust)  will be less than 38.2% and in most cases even less than 27.2% until the pent-up desire among traders to trade the rally has exhausted itself.

This is more likely a Limiting Triangle with maximum allowed thrust run of 127.50% or near 1344.  So, there is a good possibility of a sudden reversal once the Thrust has completed and the pullback that follow re-enters the triangle.  I will sell half of remaining 2/3rd SSO Swing Trade at Daily Double Top Resistance.

For the downside; I will refrain from making a new long trade if some bad news happen and we go down Monday.  Not wise trying to catch a sudden 'kick down' when SnP500 is too close to it's Daily Double Top Resistance of 1344.  Scalps are ok but daytrades and swing trades are too risky at these levels without any significant intraday pullback happening (yet).

To be forewarned is to be fore-armed.

Good Luck.

Monday, 3:50pm Update.

I was wary that the Expanding Triangle may not be complete yet last Friday since the e:3 as the longest wave consumed the least time for the whole a-b-c-d-e wavecount.

Today, the price vs. time sequence seems appropriate with the e:3 the longest and the one consuming the maximum amount of time:

-   img37.imagefra.me/i54b/aarc/155w_fe5_ubk...

Hopefully, this wavecount proves right otherwise, a spiral meltdown is expected on the intraday chart if this is actually not an expanding triangle.   Also, it seems the supposedly triangle is expanding so widely that there is a possibility this is a Non-limiting Expanding Triangle.   A Non-limiting Expanding Triangle will theoretically have no maximum target but 'theoretically' will have 1.62x the e:3 as the minimum target of the vertical thrust.

As we say in trading:  The proof of the pudding is in the eating.   So be careful, as always, since the taste of the pudding may not be what is expected and in case of the markets may prove to be 'poisoned' as well.  That is why we always use hard stops and trailing stops no matter what the TA or FA says when trying to trend trade the markets.

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