Formation of the Pattern
The symmetrical triangle is composed of two gradually converging trend lines. The upper trend line is a downward-sloping resistance line, and the lower trend line is an upward-sloping support line. When the stock price effectively breaks below the lower trend line, the downward breakout pattern is initially established. An effective break is generally defined as the closing price being lower than the lower trend line, with a decline exceeding a certain percentage (such as 3%), or the closing price remaining below it for several consecutive days.
Formation Mechanism
It is composed of two gradually converging trend lines.
The upper trend line is a downward-sloping resistance line, which means that during the upward movement of the stock price, there is continuous selling pressure above to prevent the stock price from rising further, causing the high points of each rebound to gradually decrease.
The lower trend line is an upward-sloping support line, indicating that when the stock price drops, there is a certain amount of buying power below, making the low points of each pullback gradually rise. However, as time goes by, the gap between the bullish and bearish forces gradually narrows, and the price fluctuation range becomes narrower and narrower, forming a convergent trend.
Confirmation Methods
Trend line Drawing: Connect a series of successively lower highs to form a downward-sloping trend line, and at the same time, connect a series of successively higher lows to form an upward-sloping trend line. These two trend lines intersect to form the shape of a symmetrical triangle.
Volume Change: During the formation of the symmetrical triangle, the trading volume usually shows a gradually decreasing trend. When the price approaches the vertex of the triangle, the volume should be relatively low. And when the price finally breaks through the lower trend line (the support line), the volume needs to increase significantly, which indicates that the downward-breaking momentum is enhanced and is one of the important signals for confirming the symmetrical triangle pattern at the top.
Effective Price Breakout: The price must break through the lower trend line effectively. Generally speaking, if the closing price is below the lower trend line for two consecutive trading days, and the distance between the closing price and the trend line reaches at least 3% of the average daily price range, it can be regarded as an effective breakout, confirming the formation of the symmetrical triangle pattern at the top, which indicates that the price is likely to start a downward trend.
Technical Significance
Trend Reversal Signal: The symmetrical triangle pattern at the top is an important trend reversal signal. It shows that after a period of confrontation between bulls and bears in the market, the bearish power gradually gains the upper hand, and the market trend may change from upward to downward. This provides investors with an important basis for predicting changes in the market trend in advance, helping them to adjust their investment strategies in a timely manner and avoid suffering significant losses after the market reverses.
Trading Strategies
Short Selling after Breakout: Once the symmetrical triangle pattern at the top is confirmed, that is, the price breaks through the lower trend line effectively and the trading volume increases, investors can consider establishing short positions. The timing of short selling can be chosen during the retracement and confirmation process after the breakout. If the price retraces to the vicinity of the lower trend line but fails to stand above this trend line again, it can be regarded as a good entry point for short selling.
Stop-loss Setting: To control risks, while establishing short positions, a reasonable stop-loss level should be set. The stop-loss level can be set at a certain distance above the upper trend line or the vertex of the triangle, generally appropriate when the closing price exceeds this position by 3% – 5%. If the price breaks through the stop-loss level unexpectedly, it means that the market trend is inconsistent with the expectation, and the stop-loss should be executed in a timely manner to avoid further expansion of losses.
Target Setting: By measuring the height of the Bearish Symmetrical Triangle at the top (usually the vertical distance from the vertex of the triangle to the bottom), measure the same distance downward from the breakout point to obtain the initial price target. Investors can use this target as the profit target. When the price reaches or approaches this target, they can consider partially or fully closing the position to take profits.
However, in actual operation, it is necessary to make a comprehensive judgment in combination with the actual market situation and other technical indicators, and flexibly adjust the profit target.
Calculation Method
How to predict potential decline of the stock price through powerful technical analysis?
- The vertical distance from the vertex of the triangle to the bottom. As is shown in the chart, 80-60=20.
- Once the price breaks below the neckline, theoretically, the price is expected to drop by at least an amplitude equal to this vertical distance. 65-20=45，45-20=25
In this chapter, two cases of China’s CSI 300 Index are used for analysis. The CSI 300 Index in China is as representative as the S&P 500 Index in the US stock indices.
Case1 CSI 300 Index (2021-2023, Weekly Chart)
How to predict potential decline of the CSI 300 index through powerful technical analysis?
- The vertical distance from the vertex of the triangle to the bottom. As is shown in the chart, 5900-4650=1250.
- Once the price breaks below the neckline, theoretically, the price is expected to drop by at least an amplitude equal to this vertical distance. 4750-1250=3500
Case2 CSI 300 Index (2018-2019, Weekly Chart)
How to predict potential decline of the CSI 300 index through powerful technical analysis?
(1) The vertical distance from the vertex of the triangle to the bottom. As is shown in the chart, 4395-3750=645.
(2) Once the price breaks below the neckline, theoretically, the price is expected to drop by at least an amplitude equal to this vertical distance. 3750-645=3105
