The symmetrical triangle is one of the most commonly used chart patterns by active traders. The pattern is formed during a period of indecision and is easily recognized by its distinct shape. As you can see from the chart below, the pattern is constructed by drawing two trendlines that connect a series of sequentially lower peaks and a series of sequentially higher troughs. Both trendlines act as barriers that prevent the price from heading higher or lower, but once the price breaches one of these levels, a sharp movement usually follows.
Symmetrical triangles are generally regarded as a period of consolidation and, as a result, they are deemed to be neutral in direction until the price breaks beyond one of the trendlines. A break below the lower trendline is used to signal a move downward, while a break above the upper trendline signals the beginning of a move higher. As you can see above, traders will want to see a sharp increase in volume accompany the move beyond the trendline because it is often used to confirm the sudden surge in momentum.
Allegheny Technologies Inc. (NYSE:ATI) - Looking at the daily chart of ATI, you'll notice that it is trading within a symmetrical triangle pattern. Notice how the converging trendlines have acted as support and resistance in the past and traders will now watch to see which of these barriers will be broken first. The price is currently finding support near the lower trendline, which suggests that it may be nearing a major turning point. A drop below $72 will be used by the bears to signal an increase in selling pressure and would likely be followed by a move lower. On the other hand, bullish traders will watch for a bounce off the nearby support and wait for the price to break above the upper trendline to signal a move higher. More time will be needed to see which direction this stock will head, but it will definitely be on the radar of many short-term traders.
Champion Enterprises Inc. (NYSE:CHB) - On May 6, I noted that CHB was testing the support of a symmetrical triangle. This is an excellent chart for demonstrating the type of breakdown that bearish traders look for when the price closes below the support of this type of triangle. This chart has caught the attention of traders again because the recent decline was halted when it ran into a historical level of support ($7.80). As you can see from the chart below, the bears were unable to send the price below $7.80 earlier in the year, which suggests that the downward momentum may be ending and that the bulls are ready to take over. Technical traders will keep a close watch on this stock to see if the recent bullish price action will be able to continue.