Time to take a short position in the market? Look for this chart pattern – Business Standard

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The Descending Triangle shows price weakness in the stock market. It is recognized as a bearish indicator, highlighting the fragile strength that results in negative sentiment. It is one of the chart patterns that reflect the significance of profit booking and exiting bullish positions.

The Descending Triangle consists of a horizontal trendline and a falling trendline. Herein, the falling trendline connects the lower highs, wherein the stock made continuous attempts to absorb selling pressure, but the resistance and hurdle stood firm, and selling pressure aggressively is seen forcing a reversal to lower levels. The horizontal trendline shows the lower level that provides support for a positive reversal. A breakdown occurs when the securities break this horizontal support with firm price action.

Traders and short-sellers cautiously watch the formation of Descending Triangle as it provides an opportunity to make quick gains. Building up short positions further pushes the price in a downward spiral. Though the chart pattern alone also suggests a negative bias, the addition in volumes makes the signal more confirmative and concrete.

The opposite of this negative indicator is called Ascending Triangle. This represents a bullish bias with a breakout above the horizontal line, which continuously sees attempts to conquer on the upward side.

Descending Triangle pattern is confirmed below the breakdown on the horizontal support line. It shows a negative bias for upcoming sessions and, if at all, the stock price witnesses any recovery, then the selling pressure halts the upward bias. The pattern is a continuation of the downward weakness, especially in the bearish environment.

The formation of such a pattern at the top of the trend firmly suggests profit booking and reversal in a negative trend. Such instances alert traders and investors to look for opportunities in profit booking or avoiding any long positions.

How to trade Descending Triangle pattern

— Selling or shorting opportunities arrive only below the breakdown of the horizontal support line.

— Look for volumes as one of the parameters for an aggressive downward move.

— Any breach of significant moving averages like 50-day moving average (DMA), 100-DMA, or 200-DMA further confirms a negative bias.

— Stop-loss is considered as the falling trendline level.

— The target is usually the difference between the highest high of the formation and the horizontal support line. Nevertheless, sometimes the target can provide a double strike rate with price showing firm downside.

— Unless the major technical indicators like Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD), Stochastic, Williams %R, Commodity channel index, etc. don’t show a reversal in trend, the downside may see exaggerated bearishness.

Conclusion

The Descending Triangle pattern is a bearish pattern and signifies weakness. This downside move may see prolonged negative bias unless a definitive signal does not appear. The formation of such negative patterns alerts traders and investors to book profits and look for shorting gains. The returns are significantly higher in the overall bearish trend. When this pattern appears on the top of a bullish trend, it clearly hints at booking profit. CLICK HERE FOR THE

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First Published: Tue, July 13 2021. 08:12 IST

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