In this lesson, we’ll explore the Inverted Triangle formation—an intriguing technical‐analysis pattern often interpreted as a potential trend‐reversal signal. It appears less frequently than classic triangles, but its implications merit attention.
Characteristics of the Inverted Triangle
-
Turning Points:
Four pivot points are required: two highs and two lows that form a diverging, widening triangle. -
Breakout Direction:
A sell signal occurs when price breaks below the lower boundary of the formation, indicating that selling pressure has overtaken buying and further declines may follow. -
Measured Move:
The expected drop after the breakdown should be at least equal to the triangle’s height measured from the last pivot high.
Trading Tactics
For Existing Stockholders
-
Near the Upper Edge:
Consider selling as price approaches the upper boundary for a fifth touch, if it fails to break out. -
On a Downside Breakdown:
Exit immediately to limit losses once price closes below the lower trendline.
For New Entrants
-
Caution on Upside Breakouts:
Avoid buying on a breakout above the upper edge—this is not a traditional buy setup. -
Exception:
If price breaks up from a bullish inverted triangle with a strong volume surge, you may consider initiating a position on the subsequent pullback.
Additional Considerations
-
Volume Confirmation:
A volume increase on the downside breakout strengthens the sell signal. Conversely, heavy volume on an upside breakout may suggest a rare bullish reversal. -
False Breakouts:
Breakouts lacking volume confirmation can be deceptive. Always wait for supporting signals and manage risk accordingly. -
Support and Resistance:
The trendlines of the inverted triangle often become future support or resistance levels once the pattern has played out.
Summary
The Inverted Triangle, though less common, provides valuable cues about possible trend reversals. By understanding its expansion characteristics, watching volume at breakouts, and applying disciplined risk management, you can better leverage this pattern in your trading decisions.
