Bulkowski’s Monthly Symmetrical Triangles

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Background

I always thought of the monthly scale as a useless one until I started pondering whether I could detect any reason for the run up to the bull market peak in 2000. That’s when I found symmetrical triangles near the start of the run. However, these triangles weren’t isolated to year 2000, but appeared in other years as well, all leading to large gains. This page describes what I found and how you can trade the pattern for big bucks.

I searched 788 stocks and found 147 symmetrical triangles on the monthly charts using data from January 1988 to July 2006. Few stocks covered that entire period. I measured the rise from the breakout to the highest high before price tumbled at least 20%. The results do not include commissions or fees and represent over a hundred perfect trades. You will not be able to duplicate these results in actual trading. You may do better…or worse. Also, the samples are few (124 in a bull market, 23 in a bear market), so expect results to change.

Identification

I won’t describe what to look for. You can find that information on the symmetrical triangles page of this site. Symmetricals appear the same regardless of the time scale you select.

Performance

The methods for measuring performance are the same as that described in my book, Encyclopedia of Chart Patterns, Second Edition. Consult its glossary for details.

The average rise of 124 patterns in a bull market was 121% with 83% logging more than 45%. This is the highest average rise of any chart pattern I have looked at. Just one pattern failed to rise at least 15% (price climbed 14%). The average gain for the S&P 500 over the same period was 35%.

Tall patterns (taller than the median 43.56% height divided by the breakout price) performed significantly better than short ones, 154% versus 93%. Patterns narrower than the 399-day median performed better with post breakout rises averaging 128% versus 114% for the wide ones. The best combination of height and width was tall and narrow. The 16 triangles fitting that category scored an amazing rise averaging 262%. The worst performing triangles were short and narrow, with gains from 46 patterns averaging 90%.

Those patterns with breakouts within a third of the yearly low rose 182% (30 samples) post breakout, the middle third climbed 105% (76 samples) and those within a third of the yearly high climbed an average of 92% (18 samples). The sample count is thin, so expect results to change. However, the trend suggests buying the stock as close to the yearly low as possible for the best results (buy low, sell high). The average hold time was 367 days (one year).

Patterns with breakouts in the same direction as price entering the triangle ( that is, continuations) scored best with gains averaging 134% (76 samples) versus 97% (48 samples) for those triangles acting as reversals of the prevailing price trend.

Triangles with short-term (less than 3 months) trends leading to the triangle did best post breakout, climbing 167% (29 samples). Intermediate-term (3-6 months) placed second with gains of 132% (39 samples) and long term was last with gains averaging 91% (55 samples).

Volume trends downward 64% of the time, but when it trends upward, price gained an average of 140% (45 samples). Patterns with down-sloping volume gained 107% (79 samples).

Trading

If you see a symmetrical triangle on the monthly chart, wait for the upward breakout before buying. The breakout occurs when price closes above the top trendline. Stick with the monthly chart and draw an up-sloping trendline beneath the price lows. If price closes below the trendline, then consider selling. In a few cases, price peaked and pulled back to the triangle before resuming the uphill run. In such a case, buy again or add to an existing position once the upward trend becomes clear.

Since a trendline can cause a large giveback from the ultimate high, you might consider selling if price fails to make a higher high and higher low the following month. Many times, price forms a straight-line run up, making higher highs each month. Eventually, this trend will falter and price will make a lower high and lower low (don’t sell if it makes a higher low). That may be the time to sell. You’ll be a month late, but you should be able to buy back in at a much lower cost later when price resumes the uptrend. Check your monthly price chart to see how often this technique would work.

Busted symmetrical triangles also occur, but they are rare. Price breaks out downward and then shoots out the top of the triangle. They make for excellent profit opportunities.

In the picture to the left, I show four setups. Clockwise from upper left, we see price moving up at a straight-line run, approximating 45 to 65 degrees then consolidating (perhaps for years because this is on the monthly scale), then forming the symmetrical triangle. After that, the breakout occurs and price quickly pushes through meager, if any, overhead resistance to begin making new highs.

To the right of that is the preferred setup. Price makes a straight-line run leading to a period of consolidation that turns into the triangle, and then the breakout resumes the uptrend.

Below that are two similar setups. The first shows a peak higher to the left of the triangle. When the breakout occurs, price reverses at the peak and forms a double top. The chart to the left of that shows price just hitting overhead resistance and dying. The key to these failures is the strength of the overhead resistance, so make sure you check for that.

You will have the most success with triangles that are at or very near the yearly high with no overhead resistance. Plus, if price is moving upward into the pattern in a straight-line run, it often resumes that brisk uphill run after the breakout. Hercules, the chart at the top of this page, shows an example.