Today, November 5, I'm sitting down with EWI's chief commodity analyst and Futures Junctures Service editor Jeffrey Kennedy to discuss why good things often come in slow-moving packages; namely, the contracting triangle pattern.
Nico Isaac: At first glance, contracting triangles seem about as exciting as watching cheese mold. They are often time-consuming, sideways moving patterns that take weeks, or even months to develop. So, what makes them worthy of being one of your favorite of all 13 Elliott wave structures?
Jeffrey Kennedy: The exciting part of a contracting triangle is not about the pattern itself; but rather, about what comes after it's done. These triangles are terminating patterns. They precede dramatic moves, and in that way, are like the calm before the storm.
Nico Isaac: Terminating patterns. So that means they can only occur in the second to last wave of a complete sequence: Such as wave 4 of a 5-wave impulse, or wave B of an A-B-C correction.
Jeffrey Kennedy: Exactly. Contracting triangles unfold as five, overlapping waves labeled A-B-C-D-E (with a 3-3-3-3-3 subdivision). A "regular" triangle takes place entirely within the area of preceding price action; while a "running" triangle sees wave B exceed the start of wave A to produce a new extreme. Below is an ideal rendering:
NI: Okay. You've described the calm. What about the "storm" that occurs after the triangle is complete?
JK: I have one word for you: "thrust." Once wave E of the triangle ends (to finish wave 4), wave 5 often develops as a sharp, swift move in the opposite direction -- the force of which is strong enough to retrace the entire preceding wave sequence in one-half or one-third of the time it took to develop.
NI: The triangle scenario sounds like a dramatic battle scene: "Hold Your Fire." "Hold Your Fire." "Hold Your Fire." "Shooooooooooooooooot!"
JK: Yeah. It looks that way too. To wit: In the November 4
Daily Futures Junctures, I present the following close-up of the contracting triangle at work in a major commodity market.
As you can see, the triangle took its sweet time to unfold -- a six-month long, sideways trend from January to July. Then came the dramatic downward thrust in wave 5, which retraced the entire preceding wave in just three months.
NI: It doesn't get any closer to textbook than that. And, with the triangle thrust complete, it looks like this market could be on the verge of a powerful move up?
JK: So long as prices adhere to the critical support and resistance levels cited in the November 4 Daily Futures Junctures, the odds of a near-term rally are high.