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 trendline above that converges with
the horizontal line as it descends. If both lines were extended right, the
descending trendline 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.
- Trend: In order to qualify as a continuation pattern, an
established trend should exist. However, because the descending triangle is
definitely a bearish pattern, the length and duration of the current trend is
not as important. The robustness of the formation is paramount.
- Lower Horizontal Line: At least 2 reaction lows are required to
form the lower horizontal line. The lows do not have to be exact, but should
be within reasonable proximity of each other. There should be some distance
separating the lows and a reaction high between them.
- Upper Descending Trendline: At least two reaction highs are
required to form the upper descending trendline. These reaction highs should
be successively lower and there should be some distance between the highs. If
a more recent reaction high is equal to or greater than the previous reaction
high, then the descending triangle is not valid.
- Duration: The length of the pattern can range from a few weeks to
many months, with the average pattern lasting from 1-3 months.
- Volume: As the pattern develops, volume usually contracts. When the
downside break occurs, there would ideally be an expansion of volume for
confirmation. While volume confirmation is preferred, it is not always
- Return to breakout: A basic tenet of technical analysis is that
broken support turns into resistance and visa versa. When the horizontal
support line of the descending triangle is broken, it turns into resistance.
Sometimes there will be a return to this newfound resistance level before the
down move begins in earnest.
- Target: Once the breakout has occurred, the price projection is
found by measuring the widest distance of the pattern and subtracting it from
the resistance breakout.
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 is as if a
large buy order has been placed at this level and it is taking a number of weeks
or months to execute, thus preventing the price from declining further. Even
though the price does not decline past this level, the reaction highs continue
to decline. It is 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 stock declined from above 60 to the low 40s before finding some
support and mounting a reaction rally. The rally stalled just below 50 and a
series of lower reaction highs began to form. The long-term trend was down and
the resulting pattern was classified as continuation.
- Support at 45 was first established with a bounce in February. After that,
the stock touched this level two more times before breaking down. After the
second touch in March (about a month later), the lower support line was drawn.
- After each bounce off support, a lower high formed. The reaction highs at
points 2,4 and 6 formed the descending trendline to mark the potential
descending triangle pattern. I say potential because the pattern is not
complete until support is broken.
- The duration of the pattern was a little less than 3 months.
- The last touch of support at 45 occurred in late April. The stock spiked
down through support, but managed to close above this key level. The final
break occurred a few days later with a gap down, a considerable black
candlestick and an expansion in volume. The way support is broken can offer
insight into the general weakness of a security. This was not a slight break,
but a rather convincing break. Volume jumped to the highest level in many
months and money flows broke below -10%.
- After falling from 45 to 41, the stock mounted a feeble reaction rally
that only lasted three days and produced two candlesticks with long upper
shadows. Sometimes there is a test of the newfound resistance level, and
sometimes there isn't. A weak test of support can indicate acute selling
- The initial decline was projected to be 9 points (54 -45 = 9). If this is
subtracted from the support break at 45, the downside projection is to around
36. Even though the stock exceeded this target in late June, recent strength
has brought it back near 36. Targets are only meant to be used as guidelines
and other aspects of technical analysis should also be employed for deciding
when to cover a short or buy.