We called them megaphone chart patterns, in the days when we drew them by hand. As I haven’t seen a megaphone in years, let alone a set of rolled-up paper graphs, we’ll revert to calling them broadening formations, either tops or (more scarily) bottoms. These are triangles that start at the apex and widen over time – as opposed to consolidation triangles which are often symmetrical and move from left to right towards the apex. Not exactly mirror images of each other, but you get the picture.
The perfect broadening top (which are more frequent than bottoms) consists of three attempts higher, each successive one inching higher than the previous peak, interspersed with two corrections where the second is deeper than the first. The way this formation is written up in the media will depend on one’s bias. Stockbrokers and the financial press – eternal bulls – will report breathlessly on the good news, especially if in the process of setting new record highs.
Perma-bears and Cassandras will, on the other hand, be hoping for a broadening top, warning as always that ‘it will all end in tears’ plus, worse still, be laughed at and disregarded as per Greek mythology. The trouble is, these patterns can carry on for years, causing one’s emotions to lurch between hope and fear, and even resulting in one questioning the original forecast – which happens when there are more than five waves in the process.
My first chart is of the FTSE 100 where, as regular readers will know, I spotted a broadening top many moons ago – and I haven’t given up yet! Other European indices showing versions of the same thing are Amsterdam’s AEX (where the lower edge is horizontal) and Italy’s MIB, where we broke below its lower edge in November 2018.
Since December 2016 Toronto’s S&P/TSX index also has been forming a broadening top, just above 2014’s (then record) high, in turn a wee bit higher than the peak (also a previous record) in 2008. The fact that we set new records will cloud the view of most, while sceptics will focus on how hard it has been to make any meaningful gains. Mimicking other US indices, this one had a particularly torrid time in the fourth quarter of 2018, making up for lost time. Like the FTSE, the jury’s still out as to whether, or when, we might break decisively below the pattern’s lower edge.
In China, where equity indices started selling off in January 2018, bear markets are more advanced than in Europe and the US, with some having seen reluctant dips since the summer. The Hang Seng China Enterprises index looks to be forming a broadening base with multiple downside tests and bounces along the way. This has given investors ample time to decide what to do next and at what price to get involved. This is classic market behaviour, where bases tend to be long and drawn-out, while tops can be sudden and severe.
Sometimes, after a broadening top, we form a conventional triangle; adding the two together one ends up with a randomly shaped rhomboid – known as a diamond formation. These are especially difficult to spot and cause technical analysts a lot of angst along the way. Years ago, when I covered FX at Credit Suisse, the Australian dollar was doing my head in. My Aussie colleague quickly put me straight.
