Today I reach into the bag of 13 known Elliott wave patterns and pull out the most exciting corrective formation of the bunch: the Contracting Triangle. For those of you new to our pages, here's a brief definition:
A contracting triangle, or "horizontal" as it's known for its sideways direction, contains five overlapping waves labeled A-B-C-D-E. In a regular variety, the triangle takes place entirely within the area of preceding price action. In a running triangle, wave B exceeds the start of wave A to set a new extreme. All triangles occur in the position prior to the final actionary wave in the pattern of one larger degree, i.e. wave 4 of an impulse, or wave B of an A-B-C. And finally, once a triangle is complete, it is often followed by a swift, short "thrust" in the opposite direction.
Below is an idealized drawing of the pattern:
Now that we've got the academic side of the triangle covered, let's see the actual pattern at work in real time. Below is a labeled price chart of a major commodity market from Elliott Wave International's February 8 Daily Futures Junctures.
Here you see a fully completed running triangle in Minute-degree waves a through e (green circled) for Minor-degree wave B (red). Now that the horizontal is over, Daily Futures Junctures editor Jeffrey Kennedy turns his attention to the much-anticipated "thrust," or price spike, that typically follows this pattern. The question before him is crucial: Where will the thrust end and the resumption of the downtrend begin?
To determine a likely turning point, Jeffrey uses the "Triangle Thrust Measure," labeled in blue on the chart above. Jeffrey goes into great detail on how to perform this test in a six-minute long, live video tutorial in the February 8 Daily Futures Junctures. Here is the abridged version of that recording:
Draw two trendlines connecting the extremes of Minute waves b & d, and Minute waves a & c. Extend those trendlines out to the left and right until they intersect at the “Apex” of the triangle. Next, take the widest portion of the triangle, which occurs in Minute wave b. Take that distance and project it upward from the extreme of Minute wave e. That creates a likely cluster of resistance in this market.
And that’s just the beginning. Jeffrey also incorporates two other useful guidelines of contracting triangles to reinforce his wave count and add strength to his outlook for a dramatic turn ahead.