The longer term chart of Google (now Alphabet) has some interesting activity of late and I thought blogging about what is setting up may be an interesting example to learn from. The current price movement has formed a triangle pattern and rests right on its lower support line. Because triangles can break higher or lower with no edge to up or down, the investor is best to wait for confirmation and hold before entering any position. One other important piece of evidence we cannot ignore is the fact we have negative RSI momentum divergence. This gives the slight edge the eventual break will be to the downside.
You can see this is the second triangle that formed as one sits directly below the current pattern. This triangle was textbook as price broke out with above average volume and moved strongly higher and slightly exceeded its upside target before putting in a 15% correction. Notice how, at that time, RSI momentum was near the midline and with no divergence. The edge given to an upside breakout.
What happens if I add another triangle, turn it around and put it back to back with the upper one? You get (a sloppy) diamond pattern.
The diamond pattern is a rally to a new high and weakness to an intermediate support level, a second rally to a higher high and a sharp decline through support, followed by a modest third rally and a decline through longer-term trend. Because diamonds are very large patterns, the technical implications are often extremely large.
The diamond formation reversal pattern is found relatively infrequently. When it does form, however, it usually does so at market tops rather than at bottoms. This is consistent with its appearance, which suggests a confused, active market found at a top more often than at a bottom. As the figure shows, the diamond starts off as a broadening formation and then consolidates, usually forming a symmetrical triangle. The combination of price patterns first broadening and then consolidating gives the geometry for which the diamond is named. This shape becomes more apparent when trendlines, like those shown, are drawn connecting successive peaks and valleys. The shape has also been described as a complex head and shoulders with an odd center movement.
One critical thing investors who use patterns need to do is to insure they do not jump the gun. Do not invest before the pattern has completed. Just because a pattern is developing and acting ideally does not mean it will finish that way. As such, it is imperative to wait for confirmation which is, in this case, a break out from either side of the blue trendlines. For the diamond pattern your odds of success increases as 1) breakout occurs closer to apex and 2) the number of touches price makes on the trendlines increase.
While this is an excellent example if we circle back around to see what eventually happens, the ramification of Google breaking out (to either side) of this pattern has significant consequences due to is importance and contribution to the indexes. A breakdown suggests we are in for another correction and a retest of the February lows. A breakout to the upside suggests we are off to new highs and the next leg of the bull market in US stocks has begun.
Stay tuned it should be exciting either way.