The strength of the pattern
Earlier, we have covered several types of patterns that generate buy & sell signals, but it is important to note that analyzing the pattern's strength is equally important. Therefore, in this unit, we understand how to analyze the strength of the pattern.
Knowing whether the pattern is likely to be a continuation or reversal pattern has important implications for Point and Figure analysis. While the pattern is being formed, there are clues to the strength of the pattern and the subsequent breakout.
Strength is influenced by two things:
1. Sloping sides
2. Breakout and pullback
Upside and downside triangles - sloping bottom or sloping top
An up-sloping bottom makes any pattern bullish to the upside because the slope means that the demand is coming in at higher levels on each reaction. A down-sloping makes the pattern bearish because supply is coming in at lower and lower levels. These triangles are known as upside and downside triangles. They are much harder to spot in bar and line charts.
Continuation upside triangle in 3-box charts
Continuation downside triangle in 3-box charts
It is important to note that the signal will not be completed until the breakout from the pattern occurs, but the sloping bottom or top gives you a clue to the direction of the breakout thus giving an advantage to the pattern. These are very similar to triple-top and bottom patterns seen earlier and like those patterns, they can be continuation or reversal.
Like all other patterns, upside and downside triangles can fail. The perfect upside triangle within a strong trend failed to break up and instead broke below the sloping bottom triggering a sell signal. This reinforces the view that while the pattern provides you with the likelihood of the break, the signal only comes when a double-top or double-bottom signal is issued.