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Ending Diagonal Triangles

Ending Diagonal Triangles

We recognize that many investors may be unfamiliar with technical-sounding phrases like "ending diagonal triangle." Put simply, the phrase describes an Elliott Wave price pattern — one with some exciting implications for traders.

Ending Diagonal Triangles present traders with an excellent, high-confidence opportunity to enter a trade. Once the triangle is complete, the likelihood of a sharp price change produces substantial profit potential. Here's how Frost & Prechter's Elliott Wave Principle — Key to Market Behavior (pg.36) describes ending diagonal triangles:

Ending Diagonal Triangle:

A special type of wave that occurs primarily in the fifth wave position at times when the preceding move has "gone too fast," as Elliott put it. The illustration above shows an ending diagonal triangle in its typical position in larger impulse waves, though a very small percentage are also found in the "C" wave position of A-B-C corrective formations. In either case, they are found at the termination points of larger patterns, indicating exhaustion of the larger movement. A rising diagonal (pictured above and in the Flash example provided) is bearish and is usually followed by a sharp decline retracing at least back to the level where it began.

pg.36, Frost & Prechter's Elliott Wave Principle


This particular price pattern was crucial to our decision to short Concord EFS. The Concord EFS example below is from our premium stock picking service, Prime Stocks Flash. It includes the actual Flash we issued to enter the trade and the actual Flash we issued to take profits.

EWI Prime Stocks Flash

Sell Concord EFS (CE) Now
4/18/2002 9:59:43 AM

SELL 100 [or fill in the number] shares of CE at market, to Open. As a stop, BUY 100 [or fill in the number] shares of CE at 38.61, to Close. GTC.

SELL 100 [or fill in the number] shares of CE at market, to Open. As a stop, BUY 100 [or fill in the number] shares of CE at 38.61, to Close. GTC.

"Cashless commerce solutions" has a nice ring to it. Ad agencies get big bucks to come up with such slogans, which in turn appear in the ads and web sites of companies like Concord EFS, Inc. (CEFT). Catchy slogan duly noted, the pattern for this stock says that a big bout of "cashless-ness" is ahead for the poor investors who own it.

Sell CEFT now.

Analysts are infatuated with CEFT--especially its upstream price move against the two-year downward flow of the major indexes. One analyst calls it the "Porsche" of the electronic transaction industry. Options speculators are equally smitten.

Obviously these folks don't think CEFT will far more likely reverse and catch up with the plunge in the broader market, nor do they seem worried that growth in "convenience at the cash register" depends on consumers taking on more debt in a down economy. Could these issues be exactly what's on the minds of CEFT insiders, who have been heavily selling their stock in recent months?

The CEFT price pattern is what's on our mind: the upside pattern has concluded with a diagonal triangle (blue lines), evidence that the trend reversal will be sudden and deep.

Get in now by shorting CEFT with a stop at 38.61.

EWI Prime Stocks Flash

Take Concord EFS (CE) Profits Now
3/5/2003 10:38:44 AM


BUY 100 [or fill in the number] shares of CE at market, to Close. And CANCEL stop (23.31).

BUY 100 [or fill in the number] shares of CE at market, to Close. And CANCEL stop (23.31).

Ten months ago (April 18th), we recommended selling Concord EFS (CE) at 32.84. That moment appeared especially opportune because we saw the long-term pattern near the peak of an ending diagonal triangle. Indeed, that peak arrived on May 15th at 35.06, and from there, prices have declined impulsively. This confirms what the Elliott waves told us about a major trend change.

But prices have fallen a long way, and more importantly, a five-wave decline now appears complete (or very nearly so under a count which involves a triangle fourth wave). A strong "corrective" leg higher should be at hand. Stiff support resides near current levels. We also note that Wall Street is turning "neutral" on CE amidst "bad news," and that put buying has exploded in the last couple of weeks, driving put/call ratios well past the highs of the last couple of years.

Buy CE to cover short positions and cancel the buy stop at 23.31.

The above charts and commentary speak for themselves, but the outcome of this trade recommendation speaks loudest of all. This is a great example of the profit potential found in ending diagonal triangles.

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