Triangles Pattern and Elliott Wave

Triangles usually occur in the fourth wave and precede the final move in the direction of the major trend. (They can also appear in the b wave of an a-b-c correction.) In an uptrend, therefore, it can be said that triangles are both bullish and bearish. They're bullish in the sense that they indicate resumption of the uptrend. They're bearish because they also indicate that after one more wave up, prices will probably peak.

Elliott's interpretation of the triangle parallels the classical use of the pattern, but with his usual added precision. The triangle is usually a continuation pattern, which is exactly what Elliott said. Elliott's triangle is a sideways consolidation pattern that breaks down into five waves, each wave in turn having three waves of its own. Elliott also classifies four different kinds of triangles-ascending, descending, symmetrical, and expanding-all of which were seen the four varieties in both up trends and downtrends.

Because chart patterns in commodity futures contracts sometimes don't form as fully as they do in the stock market, it is not unusual for triangles in the futures markets to have only three waves instead of five. (Remember, however, that the minimum requirement for a triangle is still four points-two upper and two lower-to allow the drawing of two converging trend lines.) Elliott Wave Theory also holds that the fifth and last wave within the triangle sometimes breaks its trend line, giving a false signal, before beginning its "thrust" in the original direction.

Elliott's measurement for the fifth and final wave after completion of the triangle is essentially the same as in classical charting-that is, the market is expected to move the distance that matches the widest part of the triangle (its height). There is another point worth noting here concerning the timing of the final top or bottom. According to Prechter, the apex of the triangle (the point where the two converging trend lines meet) often marks the timing for the completion of the final fifth wave.