Triangles are one of the most frequently occurring continuation patterns. While the symmetric triangle (explained in our previous column) are neutral in their implication and denote that the prevalent trend will continue, there are others that have either bullish or bearish implications.
Ascending triangles, as the name implies, are one such bullish continuation patterns. In these patterns, the lower trend-line joining the troughs rises higher while the upper trend-line joining the peaks of the triangle are almost horizontal. These patterns are formed when the investors are bullish on the underlying security. Their willingness to buy the security at higher levels results in the formation of the higher troughs.
The pattern is completed on a decisive close above the upper trend line. Volume decreases as the triangle unfolds while an impasse is seen between the bulls and bears. However the break-out above the trend-line should be accompanied by higher volume. To measure the targets for the move following this pattern, the height of the pattern at its widest point has to be added to the point at which the stock breaks-out. Since the upper-trend line of this pattern is at an angle of 90 degrees to the Y axis, it is also called a right-angled triangle.
In the chart of Cummins India depicted above, the stock formed an ascending triangle in the long-term charts in the two years between 2004 and 2006. Note how the stock re-tested the upper trend-line following this break-out. The height of the broadest part of the triangle was (Rs 135 – Rs 78) Rs 57. The target for the pattern (Rs 57 + the break-out level of Rs 135) of Rs 192 was achieved within a year of completion of the pattern.
Ascending triangles can also be seen in Essar Oil and Glaxo Smithkline charts show here.