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High-Probability Trade Setups: A Chartist's Guide to Real-Time Trading by Tim Knight

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Chapter 7

Descending Triangles

The rules that apply to the ascending triangle—covered elsewhere in this book—can simply be turned upside down in order to understand the nature and parameters of the descending triangle, its opposite. This pattern is defined as having a horizontal line, representing the supporting price level, and a descending trendline, which constitutes the top line of the triangle. As with its twin, the descending triangle is also known as a right-angle triangle, since a line connecting the leftmost points of the existing lines would complete the three sides, and a right angle would exist in the lower-left corner of the formation.

DEFINITION OF THE PATTERN

Las Vegas Sands, shown in Figure 7.1, experienced a breathtaking 98 percent drop in value after the completion of its descending triangle. There is a horizontal line (the lower one) at about $70, and there is a descending trendline, representing resistance, showing a series of lower lows in price. The horizontal line represents support, and after it is broken slightly, there is still enough strength from the buyers to push the price a little higher and back within the confines of the triangle.

A couple of weeks later, the stock starts falling hard, and then it regains its strength and ascends to just beneath its former support level (which is now resistance). When such an opportunity comes, this is the perfect time to short the stock, because the pattern has already failed, the weakness has already been illustrated, ...

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