Those who follow the Wave Principle will tell you that knowing your wave patterns is vital. If you can identify the pattern, you can often tell the direction and nature of future price moves. There are many different patterns with names like zigzags, leading diagonals and expanded flats, but the one I'd like to focus on is the contracting triangle.
Contracting triangles are defined as five overlapping waves (labeled A-B-C-D-E) that cause a sideways movement with decreasing volume and volatility. It is delineated by converging trendlines that connect the termination points of waves A and C, and waves B and D. The chart below shows an idealized contracting triangle.
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Let's look at a real-life example.
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Above is a 5-minute chart of the Dow taken from Elliott Wave International's U.S. Intraday Stocks Specialty Service on Friday, June 18. The contracting triangle starts from the high of 10,483 and traces out all five waves before the day's close.
So now what? The pattern has been identified, but how does this help you? The answer is, now that the contracting triangle is complete, we can typically expect the following:
- Prices will "thrust" out of the triangle in a swift, short manner.
- After the "thrust", a reversal will follow.
After the editor of EWI's U.S. Intraday Stocks Specialty Service Tom Prindaville had identified this contracting triangle last Friday, he advised subscribers before the start of Monday's trading that prices would "gap up and turn down right away." And that's exactly what happened.
Tom Prindaville keeps his finger on the pulse of the Dow, S&P and NASDAQ. Get timely analysis throughout the trading session when you subscribe to the U.S. Intraday Stocks Specialty Service. Learn More>>
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The above 5-minute chart shows the Dow's trading on Monday, June 21. Friday's contracting triangle and the resulting thrust early Monday is almost text book.