Anatomy of Chart Patterns: Descending Triangle

Descending triangle it’s a bearish pattern, where the support line is horizontal and the resistance line is down sloping and touches the support line at the apex. Generally we can see this kind of pattern after a swift move near strong support zones, when price enters a phase where the uncertainty causes loss of interest in market for a brief period.

Supply is clearly visible and meets the demand at certain price level (support line). When the supply continues and the demand being distributed at certain price level, whenever price comes to support level prices tend to move up from that point (as it witnesses more demand). After some spiral moves, demand will finally be absorbed totally by the sellers and price will break the support line. As the critical support line is taken out, the increased supply accelerates the down move.

Criteria for a successful Descending triangle:

• Price will give breakout or break down in between 50 % to 75 % of the distance to apex, if prices don’t break out before that I personally don’t trade on that pattern. If prices move in side ways pattern tend to lose its efficiency after certain stage. 
  
• Volumes should drain while the pattern is forming.
  
• Note the volumes when ever the price meets the support line. Lower volumes from previous price-support point is a good indication that patter might break down.
  
• At the break down volumes and spread of the candle or bar should be more.
  
• While drawing the resistance and support lines of the triangle we need to go with highs/lows. If we lines are breaking some candles we need to look for the error percentages and volume. Low volumed errors can be ignored, but not high volumed. Tick data helps here some times.
  
• More white space should not be visible, between the waves. 
  

Example: Below is the 5 min chart of nifty futures

• Our analysis starts only after two highs and two lows are formed and joining the trend lines though them resembles a right angled triangle, where the right angle is on the left bottom.
  
• Notice the falling volumes. It is OK to have some random high volumes bars, but the overall, volumes should confirm to a diminishing look visually. I use DEMA(15) or EMA(15) for better visual. ROC(cum(v), 15) also gives reasonable indication, but not good if the volumes are too choppy.
  
• Price moving in a very narrow range and the volumes are almost dried up due to uncertainty of the trend.
  
• At one point, price gave the breakout with and heavy volumes confirm this.
  
• Price bounced back to retest the demand line, which is a good sign. The push back from the demand line adds more thrust to the down move here.
  
• Now the bears clearly won the battle, supply increased drastically and as the losing side close there longs and new participants came in price zoomed down with wide spreads and increasing volumes.