I read this article and it said, "oh there is a descending triangle forming and that spells bad news.
Really? It does? Why? Because analysts say so?
"We know only that ‘triangles’ such as this one tend to resolve themselves to the downside,” writes Dennis Gartman this morning in The Gartman Letter, which is standard reading on Wall Street trading floors everywhere. But he’s not alone by any means.
How do you know Dennis? Did you do any analysis or are you flying by the seat of your pants?
Let me figure this out, and see if the analysts are right. I have the book Encyclopedia of Chart Patterns. It is an interesting book because what it did is take a quantitative approach to chart patterns.
So we could call this chart pattern a descending triangle and that would be Chapter 48…
There are two scenarios, an upward break-out or a downward break-out. The "analysts" are saying downward is the next move.
So let’s look at those stats first:
Bull Market:
Performance Rank: 10 out of 21 (where 1 is best)
Percentage meeting price target: 54%
Bear Market:
Performance Rank: 12 out of 21
Percentage meeting price target: 50%
This means a downward break could happen, but it would be a 50-50 chance.
Let’s look at the stats for an upward breakout
Bull Market:
Performance Rank: 5 out of 23
Percentage meeting price target: 84%
Bear Market:
Performance Rank: 7 out of 19
Percentage meeting price target: 61%
Digging deeper into the statistics I look at the throwbacks and trends. From the book it said that there 592 instances where this acted as a reversal, and 574 times as a continuation. In other words a crap shot.
Would I go long or short? Long, with a partial buy. My logic is best described as follows:
| Long | Short | |
| Upward | + | — |
| Downward | – | + |
If you go long a downward movement gives you more buying opportunities. However, a short and an upward movement causes you to eat your shorts since you and other people will have to cover. This means that the risk of going short is slightly-higher than the risk of going long.
So Dennis I think you are talking from the seat of your pants…