A Look at Descending Triangles

TL;DR a descending triangle signals steadily increasing sell pressure, with resolution occurring when these traders meet buying pressure.

Technical analysis (TA) can be a complicated art/science. At its worst (hello Crypto Twitter) it’s just people drawing lines on charts to justify their own hopes. But TA is actually backed by sound psychology. After all, the market is the sum of all traders’ fear and greed. Consequently there are a few chart patterns it’s worth knowing about. The Descending Triangle is one of them.

What is a Descending Triangle?

A descending triangle is a chart pattern with a (roughly) horizontal base, matching demand from buyers. The top of the triangle slopes downwards, from a high on the left hand side, and price putting in lower high after lower high.

Bitcoin likes its triangles. Most of 2018 was taken up with a huge descending triangle after the bubble popped. We had strong support at $6k but, from February through to November, bitcoin bounced off this a little lower each time — until it finally broke down in November to $3,100.

We currently appear to be in another very similar descending triangle, which started at the end of June after the mini-bubble spike to $13,880. Price has bounced off ~$9,300, putting in several lower highs.

Why do they tend to break down?

Descending triangles tend to break downwards. Not always, but around two-thirds of the time. (Similarly, ascending triangles tend to break upwards.) The reason is fairly simple.

From the perspective of market psychology, a descending triangle shows decreasing confidence. While there are buyers at the support (base) level, sellers are willing to part with their coins at lower and lower prices — confidence is ebbing away. Ultimately, those sellers will meet buyers at the base of the triangle, selling directly into them. (In fact, triangles usually resolve before the very end.) Someone has to win this competition, and since bears are increasing in number, price tends to break through the base and head lower — down to the next support level.

But this is a market, so uncertainty is inherent. Descending triangles do not have to break down. In a proportion of cases, sellers lose and the market takes this as a signal of growing confidence, so price moves up.

What about bitcoin right now?

Bitcoin looks very much like it’s in a descending triangle, as we noted in our market report yesterday. The base is around $9,300, which roughly coincides with the 21-week EMA. There’s good support at this level. However, momentum is currently with the sellers, as bitcoin puts in a series of lower highs. TA suggests that the resolution is more likely to be downwards. At the same time, we are in a macro uptrend, with great fundamentals. Will we see a ‘failed’ triangle, with a break to the upside? Or a crash and a bounce — a shakeout before the uptrend resumes?

Good fundamentals, poor technicals. That’s a recipe for uncertainty in the short term — but for experienced and patient traders, an opportunity for profit.

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