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Commodities: Watch out for Triangle Patterns
Contracting triangles can be both frustrating and exciting
This is my latest interview with Jeffrey Kennedy, editor of Elliott Wave International's Futures Junctures Service, which brings you daily and longer-term opportunities in commodities.
Vadim Pokhlebkin: Jeffrey, in your Daily Futures Junctures, you often say that your absolute favorite Elliott wave pattern is a diagonal triangle – because they offer high-probability trade setups. What about a more common triangle variety, the contracting ones?
Jeffrey Kennedy: Well, contracting triangles can be both frustrating and exciting. They are sideways, corrective price moves that consist of five waves labeled A, B, C, D and E. They can form only as waves 4, B or X – in other words, triangles always precede the final move within a sequence. That's a key point to remember. The frustrating part is that they can go through all kinds of gyrations before finally ending in a strong thrust up or down. And that's the exciting part: After a market has contracted in a triangle pattern, it expands.
VP: Expands how? What do you mean?
JK: As prices move sideways within a triangle, the swings get smaller and smaller. That shows hesitation on the part of the traders as to which side, bullish or bearish, to commit to. Eventually, prices may almost flat-line. But once wave E of the triangle is complete, prices thrust out explosively -- in other words, the market expands, and fast. Here's an idealized diagram -- in fact, it shows a common variation of a contracting triangle, a so-called running triangle, where wave B exceeds the start of wave A.
VP: Looking at this diagram, to me, the most important part of a contracting triangle seems its thrust -- that's the part you want to catch. It appears that in a bull market, the thrust is upward, and in bear market, it's downward -- is that correct?
JK: Yes. Triangles tend to thrust in the direction of the larger trend.
VP: Do you have any real-life examples to show us?
JK: Sure. In the latest issue of my Daily Futures Junctures (April 28; online now. – Ed.), I focus on Lean Hog futures, which appear to have finished a running contracting triangle recently, as this chart shows:
In commodities, you see contracting triangles all the time, on all time frames. The key thing to remember is that a) they are corrective wave patterns, and b) they always precede the market's final move.
VP: Thanks for another valuable lesson, Jeffrey.
JK: My pleasure!
Corn: Latest Example of a Contracting Triangle. See the details now in the new, April 29 Daily Futures Junctures -- risk-free for 30 days.