Empire of Debt

by Bill Bonner

Empire of Debt

The Dow was flat Thursday. Gold dropped $17 an ounce.

What to make of it? Our “Crash Alert” flag warns of a crash in US stocks. Readers are advised to proceed with caution. But since the start of September, the news for stocks has not been bad. If you want to buy stocks, the financial press and Wall Street can give you plenty of reasons to do so. There is hope, they will tell you, for the Empire of Debt … and its capital structure. Yes – reporters, analysts and commentators are back at work. They’re finding problems. Risks. Worries. And reasons to be bullish too. Fracking, for example, will add $1,200 to the average US household income.

Bloomberg reports:

Surging oil and natural gas production brought on by hydraulic fracturing is lifting the US economy by lowering energy costs for consumers and manufacturers, according an industry-funded report.

In 2012, the energy boom supported 2.1 million jobs, added almost $75 billion in federal and state revenues, contributed $283 billion to the gross domestic product and lifted household income by more than $1,200, according to the report released today from IHS CERA.

Maybe Bloomberg is right. Maybe fracking will give the American Empire of Debt a new lease on life… much like how Imperial Rome limped on 200 years after the Crisis of the Third Century. Fracking will reduce the trade deficit, goes the logic … turn the US into an even greater manufacturer … and beef up household incomes. But we wouldn’t rush out to spend that money, if we were you …

It would be nice if the US were entering a new golden age… like the time between the end of World War II and the end of the 20th century. But that brought the seeds of its own destruction, remember. The first part of that boom was genuine – with rising wages and improving standards of living. The second part – in the 1980s and 1990s – was largely fraudulent, funded almost entirely with borrowed money. People spent more … they lived better … but they went further into debt. Now they are faced with years of debt reduction and lower living standards.

The Age of Granite Countertops

So far, the 21st century has been no golden age either. It is more like an Age of Granite Countertops. It is an age where appearances count for more than reality.

First, most Americans who are improving their standards of living are doing so by spending money they don’t have on things they don’t need. They buy bigger houses and fancier cars.

Second, when the credit bubble pops the feds try to engineer a ‘recovery’ by unleashing even more cheap credit.

The things that really matter – savings, investment, peace and prosperity – haven’t happened. The things that have happened have been big disasters – pointless wars and jackass economic policies that encouraged spending and zombieism. One of those policies is in the news again: student loans. It is another corrupt government program bearing another bitter fruit.

From Reuters on what we don't know about the $1.2 trillion student loan problem:

$1.2 trillion – the estimated amount in outstanding student debt.

$260 billion – what that amount was in 2004.

37 million – Americans with student loan debt outstanding, according to estimates from the New York Fed.

$28,000 – The typical 2012 college graduate’s debt load upon Graduation Day, according to Hamilton Place Strategies.

$9,000 – That debt load in 1993.

$810 billion and $670 billion – The total outstanding auto and credit card debt held by Americans, respectively, putting student debt into a clear lead.

The default rates:

13.4% – the national default rate for borrowers whose loans entered repayment from fall 2009 to fall 2010. (This is the first year for which the government has released three-year default data.)

22.7% – defaults in the first three years for graduates from for-profit colleges. “For-profit institutions had the highest average three-year default rates at 22.7%, with public institutions following at 11% and private non-profit institutions at 7.5%,” according to the Department of Education.

Nearly 47% of all defaults were from for-profit colleges, the Institute for College Access & Success said, even though those institutions have just a 13% share of college enrollment.

7 million – Number of student loan borrowers in default, out of an estimated 37 million total. That includes public and private loans, according to the CFPB.

Everyone Wants to Be an Insider

Student loans are only a small part of a big tableau. But everywhere you look the scene is the same. The insiders are taking more and more wealth from the outsiders. Everyone wants to be an insider. And in a democracy especially, over time, more and more people find ways to game the system and join the insiders. Finally, everyone seems to have an angle. And soon civilization is on the road to decline and ruin. This happens when there are more parasites than producers… and more voters with their hands in the cookie jar than there are people making cookies!

Thanks to Richard Russell at Dow Theory Letters, we can pass along this picture of a zombified America. From The Week:

In America, 7 out of 10 people are on the dole, said Michael Tanner. That's the percentage of people who receive more in government benefits than they pay in taxes, according to a new Tax Foundation study.

Some of these beneficiaries of Uncle Sam's largesse are the poor; another new study, by the Cato Foundation, found that families collecting various welfare benefits, including food stamps, "temporary" cash assistance, and Medicaid, could bring in the equivalent of $35,000 a year – more than someone would earn in a $20-an-hour job.

But it's not just the poor who feed at the trough of our vast welfare state. Most seniors get far more from Social Security and Medicare than they contribute in payroll taxes.

Giant corporations get $100 billion in direct payments and subsidies from the government, in the form of farm and "green" energy subsidies, and Export-Import bank loan guarantees. The military squanders billions on weapons systems it doesn't need, to fund jobs in key lawmakers' districts.

Yes, dear reader. A little democracy – restrained, say, by a Bill of Rights and a Constitution – may be a good thing. But sooner or later the zombies take over. Then it is best understood by the old definition. Democracy: a political system in which two wolves and one sheep vote on what to have for dinner.

Hark… is that the dinner bell we hear?

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Will Berlusconi Be Responsible For Another European Crisis?

by Tyler Durden

Sylvio Berlusconi is no stranger to being a catalyst for European crisis: in November 2011 it was his unwillingness to leave the PM post (and be replaced with a Goldman technocrat), that precipitated a bond crisis accented by the ECB's unwillingness to interject and buy Italian bonds until the career politician had left. Tomorrow, an Italian Senate committee is due to begin hearing arguments on whether to eject ex-PM Berlusconi from Parliament and on. The special Senate Elections and Immunities Committee will have its first hearing on Berlusconi’s expulsion from the Parliament and six-year ban on 9 September. It seems now less likely that a vote will already take place on 9 September. The decision of the commission will be followed by a vote of the whole Senate. According to Deutsche Bank, the duration of the process is unclear. Indeed, it could be lengthened by several months if the commission (or the parliament) asks for a ruling of the Constitutional Court. However, a worst case scenario could see the government fail, early elections being called, and a repeat of this February's political circus all over again, only this time with even less political capital, if such a thing ever existed in Italy.

As the Italian stock market already made clear on several occasions over the past two weeks, a political crisis in the coalition government which could see Berlusconi's PDL withdraw support from Letta, at a time when Europe is said to be recovering on the back of the peripheral countries (Germany has posted a slew of economic data misses recently) will hardly boost sentiment. Which is why all of Italy, and Europe will be following, the latest political spectacle in Italy quite closely.

Reuters reports:

Italian Prime Minister Enrico Letta warned of the risk of fresh political turmoil on Sunday, a day before a Senate committee meets to decide whether to expel the country's former leader Silvio Berlusconi from parliament.

As the two main partners in his fragile coalition prepare for a showdown over Berlusconi's future, Letta told business leaders that economic recovery had been hampered for too long by Italy's "permanent political chaos".

"Instability has a cost, it would mean that interest rates rise again and we'll all have to pay more," he said at a conference in the lakeside town of Cernobbio outside Milan. "Instability has drastic costs, whereas stability pays."

Naturally. The only question is at what cost does stability come: it seems that in Italy legitimizing behavior that abuses child prostition, tax fraud and mafia racket is an acceptable price to preserve the illusion of "stability" as measured by the FTSE Mib, and of course, confidence - the most scarce commodity in Italy and the world over the past 5 years. Which is precisely what is at stake tomorrow.

Letta's comments come a day before a Senate committee meets to begin deliberations which could lead to Berlusconi, who has dominated Italian politics as a politician and media magnate for decades, being expelled from parliament following his conviction for tax fraud last month. The cross-party panel has become the focal point of a battle over the political future of the 76 year-old billionaire, who was sentenced to a four year prison term which is likely to be commuted to one year under house arrest.

The PDL has warned it will pull out of the coalition and bring down the government if center-left members vote to start proceedings for expulsion although Berlusconi faces at least a year in political exile in any case once his sentence begins.

"I hope the government doesn't fall," said Marco Tronchetti Provera, chairman of tire maker Pirelli, echoing the concern. "I hope that a solution is found and that the country can start taking care of concrete problems in the interests of everyone."

A plan B is already being hatched to deal with the fallout of an unfavorable, for the stock market, decision:

Behind the apparently intractable positions, however, there may be scope for an arrangement which allows more time to work out a deal that could avoid a definite break.

Fabrizio Cicchitto, a former PDL floor leader in the lower house told the right wing Libero newspaper, which is generally close to Berlusconi, that much would depend on how the committee meeting plays out.

A discussion cut off in a couple of days, turning the committee into a "firing squad", would be a "provocation". But if PD members took time to discuss the status of the Severino law "we should maintain our support for the government."

"We can act in reaction, that's one thing, but if we in the PDL were the first ones to set off the crisis, we would be making a serious mistake," he said.

So once again, justice is left at the door when the threat of a selloff is at stake. Because in a world built on the foundations of artificial confidence and kept together with central banker superglue, nothing can be allowed to shake the false reflexive myth that things are fine and getting better: why just look at stocks.

As for our rhetorical title question: the answer, of course, is no. When a human decision, one "potentially" motivated by money has so much impact, one can be assured that nobody will vote with their conscience and everyone will vote with their offshore bank account.

* * *

For those curious for more, here is Deutsche Bank with a comprehensive step by step analysis of what may happen as the fate of European stock markets hinges on the decision of an Italian court:

Italy: political and fiscal update

As expected, political tension over the summer increased following ex-Berlusconi final conviction for tax fraud in July. Tension peaked at the end of last week with a communiqué from the PDL that seemed to suggest that a government collapse was imminent. But, in our view, since Monday 26 August the likelihood of the government survival has increased materially due to three main factors, which we discuss below in their chronological order:

• Sharp negative market reaction to the potential government collapse

After a weekend where it appeared that the hawks within the PDL had the upper hand, the very negative equity market reaction has led, in opinion, to a more prudent approach. On Monday evening, ex-PM released an official communiqué calling for a suspension of the  statements from PDL members of the parliament that had heightened tensions.

• Tentative openings on a Constitutional Court ruling on the ban from public office

One of the consequences of the final four-year tax fraud conviction for Berlusconi is the likely ban from holding public office. This is due to two parallel procedures:

— First, the July ruling by the Court of Cassation that upheld the tax fraud conviction against Berlusconi ordered a new appeal to review the duration of the ban from public office, between one and three years. The decision of the Milan Appeal Court should come before the end of the year. According to Il Sole 24 Ore, it never occurred in the past that the Parliament disregarded the Court’s decision, but there have been cases were it took time for the decision to be applied.

— Second, a longer (six years) and more immediate ban could be triggered by the December 2012 anti-corruption law. The law establishes that a more-than-two year conviction forbids that person from standing for election to the Italian parliament for six years and her/his expulsion from the Parliament.

A special Senate commission (Elections and Immunities Committee) will have its first hearing on Berlusconi’s expulsion from the Parliament and six-year ban on 9 September. It seems now less likely that a vote will already take place on 9 September. The decision of the commission will be followed by a vote of the whole Senate. The duration of the process is unclear. Indeed, it could be lengthened by several months if the commission (or the parliament) asks for a ruling of the Constitutional Court.

On 27 August in an interview with Il Corriere della Sera, ex-president of the Lower House Luciano Violante, a senior member of the PD, constitutional expert and close to the President of the Republic, opened the door to Berlusconi/PDL’s request for a ruling of the Constitutional Court. The PDL's argument is that the law cannot be applied to Berlusconi's case as the crimes occurred before the law was approved. Hence, according to the PDL the law cannot be applied because of the non-retroactivity principle (Art 25 of the Constitution).

However, the PD does not officially support Violante’s proposal. Although the PD continues to be fragmented, the whole party would risk paying a hefty price in terms of electoral support in favour of Grillo’s 5SM if it were to accept Berlusconi’s request for a Constitutional Court hearing. Hence, we may have to wait until 9 September to know the position of the PD. In the meantime, political tension may increase again.

• Cancellation of the 2013 property tax on first residences

On 29 August the government reached a compromise to cancel the property tax (IMU) on primary residences for 2013 and completely replace it with a new\ levy from next year. his is an important step for Letta’s government, at least in the short term for two reasons:

— Importance of IMU in the PDL manifesto: It is now more difficult for Berlusconi to use a motivation about the economy to bring down the government. His economic reform programme was based on the cancellation of the property tax on primary residences. If he wanted to use an excuse, he could have found enough reasons to say that his requests/electoral promises were not fully respected. Instead, he released a very positive official statement welcoming the government decision.

— Immediate early elections would jeopardize IMU cancellation: Note that the 29 August decree cancelled only the first tranche of property tax on primary residences due in June. The resources to cancel the second tranche will be finalized in a decree in mid October along with the 2014 budget law. This is potentially an important passage from a political point of view. Were either the government to fall before issuing the decree or the Parliament to be dissolved before it approves the decree, the December IMU tranche on first properties will have to be paid. Hence, from an electoral point of view, it would be difficult for Berlusconi to justify a sudden removal of his support to Letta government, above all after his and PDL’s very positive reaction to the government announcement.

• Political volatility is not over

Although less fragile, the above considerations do not mean that the Government is safe. The PDL now expects a step forward from the PD on 9 September by at least delaying the decision on Berlusconi and ideally agreeing to ask for a Constitutional Court ruling. The PD faces a trade-off between the government survival and risking alienating part of its electorate. Hence, political volatility is likely to remain. Although Italian sovereign yields remain low relative to the average of the past two years, the cost of political uncertainty and the sharp slowdown in structural reforms is reflected in our view in the compression of the spread of Spain’s sovereign yields versus Italy’s.

Time will be an important factor. In our view, the ex post credibility of Berlusconi’s threat to trigger a fall of the government will decrease as time goes by as the ban from public office closes in. Berlusconi would need to trigger the fall of the government in the very short-term if he were to maximise his possibility to stand for election.

Furthermore, going for early elections is a high risk strategy. By supporting the government the PDL and its leader will maintain a crucial role in determining Italy’s policies. A fall of the government would lead to an improved position only if the PDL were to win the election and obtain the majority premium in the lower house. The PDL would then also gain the majority in the various Lower House commissions. Although the PDL appears to maintain a lead in opinion polls over the summer, there is also the risk the PD could unite behind the young mayor of Florence who, in our opinion, could increase materially the possibility that the centre-left obtains an improved electoral response above all among the centrist voters.

Overall, we think that is now marginally more likely than not that the Government survives the next couple of months. The probability that the government then remains in charge for the whole of 2014 would increase materially.

That said, the hawks within the PDL could regain centre stage were the current legal issues for the ex-PM to worsen. Furthermore, note that there are other pending trials involving the ex-PM Berlusconi.

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Emerging Markets’ Euro Nemesis

by Daniel Gros

BRUSSELS – Emerging markets’ currencies are crashing, and their central banks are busy tightening policy, trying to stabilize their countries’ financial markets. Who is to blame for this state of affairs?

Illustration by Paul Lachine

A few years ago, when the US Federal Reserve embarked on yet another round of “quantitative easing,” some emerging-market leaders complained loudly. They viewed the Fed’s open-ended purchases of long-term securities as an attempt to engineer a competitive devaluation of the dollar and worried that ultra-easy monetary conditions in the United States would unleash a flood of “hot money” inflows, driving up their exchange rates. This, they feared, would not only diminish their export competitiveness and push their external accounts into deficit; it would also expose them to the harsh consequences of a sudden stop in capital inflows when US policymakers reversed course.

At first sight, these fears appear to have been well founded. As the title of a recent paper published by the International Monetary Fund succinctly puts it, “Capital Flows are Fickle: Anytime, Anywhere.” The mere announcement that the Fed might scale down its unconventional monetary-policy operations has led to today’s capital flight from emerging markets.

But this view misses the real reason why capital flowed into emerging markets over the last few years, and why the external accounts of so many of them have swung into deficit. The real culprit is the euro.

Quantitative easing in the US cannot have been behind these large swings in global current-account balances, because America’s external deficit has not changed significantly in recent years. This is also what one would expect from economic theory: in conditions approaching a liquidity trap, the impact of unconventional monetary policies on financial conditions and demand is likely to be modest.

Indeed, the available models tell us that, to the extent that an expansionary monetary policy actually does have an impact on the economy, its effect on the current account should not be large, because any positive effect on exports from a weaker exchange rate should be offset by larger imports due to the increase in domestic demand.

This is what has happened in the US, and its recent economic revival has been accompanied by an expansion of both exports and imports. The impact of the various rounds of quantitative easing on emerging markets (and on the rest of the world) has thus been approximately neutral.

But austerity in Europe has had a profound impact on the eurozone’s current account, which has swung from a deficit of almost $100 billion in 2008 to a surplus of almost $300 billion this year. This was a consequence of the sudden stop of capital flows to the eurozone’s southern members, which forced these countries to turn their current accounts from a combined deficit of $300 billion five years ago to a small surplus today. Because the external-surplus countries of the eurozone’s north, Germany and Netherlands, did not expand their demand, the eurozone overall is now running the world’s largest current-account surplus – exceeding even that of China, which has long been accused of engaging in competitive currency manipulation.

This extraordinary swing of almost $400 billion in the eurozone’s current-account balance did not result from a “competitive devaluation”; the euro has remained strong. So the real reason for the eurozone’s large external surplus today is that internal demand has been so weak that imports have been practically stagnant over the last five years (the average annual growth rate was a paltry 0.25%).

The cause of this state of affairs, in one word, is austerity. Weak demand in Europe is the real reason why emerging markets’ current accounts deteriorated (and, with the exception of China, swung into deficit).

Thus, if anything, emerging-market leaders should have complained about European austerity, not about US quantitative easing. Fed Chairman Ben Bernanke’s talk of “tapering” quantitative easing might have triggered the current bout of instability; but emerging markets’ underlying vulnerability was made in Europe.

The fickleness of capital markets poses once again the paradox of thrift. As capital withdraws from emerging markets, these countries soon will be forced to adopt their own austerity measures and run current-account surpluses, much like the eurozone periphery today. But who will then be able – and willing – to run deficits?

Two of the world’s three largest economies come to mind: China, given the strength of its balance sheet, and the eurozone, given the euro’s status as a reserve currency. But both appear committed to running large surpluses (indeed, the two largest in the world). This implies that, unless the US resumes its role as consumer of last resort, the latest bout of financial-market jitters will weaken the global economy again. And any global recovery promises to be unbalanced – that is, if it materializes at all.

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Bear Expanding Triangle

By Tothetick Education

The Expanding Triangle as a price pattern presents in all markets, time frames, & price ranges. Interestingly there is some debate concerning this pattern. Some technicians feel this pattern is: very rare, strictly a reversal, strictly a trend continuation. As the debate continues, their versatility has made Expanding Triangles available as either a bullish or bearish trend continuation pattern or a reversal pattern depending on the trading environment in the background & the pattern is not hard to find. Regardless of when they present Expanding Triangles can be a very powerful pattern.

Visually the Expanding Triangle is characterized by a series of higher highs & lower lows regardless of when it presents. The shape of the Expanding Triangle is altered by the slope of the ascending resistance line & the slope of the descending support line which is ‘expanding’ or; inclining away from each other. The entire pattern can appear right-angled or tilted. The ‘tomahawk’ appearance of the Expanding Triangle is the mirror image or flipped in direction compared to the contracting symmetrical triangle. The Expanding Triangle pattern starts with the price action squeezed tightly in the Apex & as the pattern develops the price action swing high to swing low widens or spreads & therefore this pattern is also sometimes referred to as an ‘expanding apex’.

Expanding Triangles vary in their duration & are often quite large which offers nuances for traders during the development. They will have at least two swing highs & two swing lows in price. Traders should be prepared to adjust the trendlines as needed with additional swings. Overall volume usually diminishes as the pattern develops because traders become more & more unsure as to the market’s future direction. Eventually prices will break the immediate price range as outlined by the triangle extensions of support & resistance.

Traders can look to trade the Expanding Triangle in numerous similar methods regardless of market environment but with several nuances can ‘stack the deck’ which increases the risk-to-reward ratio for profits. The continuation pattern is one of the best performers statistically & the odds to trade an Expanding Triangle increase dramatically when traded with a controlling trend.

The bearish continuation pattern has 3 phases:

1) Background: A Strong impulsive, thrusting action with a surge in volume & price establishes a clear picture of the controlling bearish trend direction. In our expanding triangle price pattern it is represented visually by an up-side-down Pole, tip pointing down. Deeper and created with more drama the better as the Pole is the Key to recognizing the potential for the continuation of the pattern. The Pole represents trend direction as well as its strength & often this pattern is initiated as a new breakdown in price from an established bearish area.

2) The second phase is a pause for consolidation of the action both in volume & price and is represented by the expanding triangle. As traders we like to see this phase very short in duration with only 2 or 3 swings while our price action is range bound maintaining the higher highs & lower lows shape and the volume is ‘resting’. The best breakouts occur at 50-75% of the triangle completion. Typically this pattern will have several intermediate failed efforts to reach either the support or resistance as outlined by the triangle extensions. As with most patterns it benefits the trader to be aware of the ‘50-50’ or ‘muddy trench’ price area as outlined by the triangle apex. Traders should judge the risk:reward for entries based on the expectation with this pattern of the expansion of the price range with each subsequent swing in prices while zig-zagging through the apex line.

The pattern confirms as a bearish continuation pattern if the action creates a new bearish breakdown with a surge again from the bears in both volume & price. The immediate lower support outlined by the expanded triangle is the area traders look to see confirm the breakdown. Typically the action will mimic the volatility & energy experienced with the Pole creation. Since during formation the expanded triangle has offered an increasing price range it is highly recommended to pay close attention to the

1) volume after the breakdown as an aid in recognizing further potential for the pattern. With large patterns where the definition of immediate support & resistance has been ‘widened’ in price, re-tests of the apex &/or breakdown price are common before the trend can continue.

Options for Trading the Expanding Triangle as a bearish continuation pattern:

There are several methods of trading this pattern and it depends on your trading style.

Aggressive traders will enter short trades right around the resistance trendline once sufficient resistance has confirmed. The concept is that the trend is on your side and the bears are maintaining a lower level of resistance below the breakdown. Early entry opportunities will exist but remember the concept of the pattern…the definition of resistance will be higher in price with each subsequent swing so give yourself room for a reward. Traders should closely monitor the S&R lines to anticipate price swing extensions. Stop placement can be fairly tight right above entry & the recommendation with this pattern is to refer to a larger time frame for additional confirmation. After entry stops can be adjusted downward accordingly.

Note the ‘mid-line’ created using the apex as the measurement. Traders can gauge success of the immediate swing &/or base profit targets on this incremental value. When price approaches the previous triangle swing low price & then the lower support line extension, you should gauge the momentum: if you see that the momentum is strong stick to the position. However, if you see that support prevails, close the trade & take your profits to maximize the reward. The reaction seen in volume in these areas is key.

The aggressive trading method can highly increase the profit potential of any triangle, as you can trade the same pattern several times & profit from the ranging swing movements inside the pattern. However, remember that as a trend continuation pattern traders want this consolidation triangle formation to be relatively brief. Two or 3 swings may turn into more with this triangle but the 50-75% formation concept aids trade consideration.

Conservative traders will enter a trade once the lower support line has been broken &/or the new breakdown has confirmed. Often as with many patterns, it may take a 3^rd effort.

(inside trader note: #1 3 efforts increases trader observance #2 better range in price opportunities both directions also means better risk:reward & #3 markets often 'move' in 3's.)

False breakouts do happen and confirmation needed is always a traders’ choice. Several methods that apply here for either intrabar &/or close bar options offered in sequence: breakdown below support price, retrace holds new resistance line, price clears breakdown swing low price, larger chart combination.

Stop placement considerations can be aggressively lowered after the breakdown of the price.

Measured Move Targets based on structure of Pole & the Bear Expanding Triangle

Aggressive with Momentum & Volume: duplication of the original move or trader choice measurement of the Pole:

• Apex or BreakDown price (minus) Pole measure = target
• Pole measure = (Pole Base price (minus) Pole Tip price)

Aggressive with Momentum & Volume: swing action during formation of Triangle may offer several opportunities:

• Expanding Triangle measure (subtracted from) /OR (added to) Apex = target
• Expanding Triangle measure (subtracted from) BreakDown price = target
• Expanding Triangle measure = (swing high price of triangle (minus) swing low price of triangle)
• Note: Short entry option with trend bias but, long options may be available based on trader’s definition of ‘room’ using the Apex & S&R extensions as the guide
• Recommend considering coordination with larger time frame & consider...where is risk lower if able to use a tight stop worth the reward potential.

Conservative: waits for at least 3 clear efforts or swings to establish Resistance:

Targets are measured the same regardless of trader style.

Often the widest Swing High to Swing Low of the Expanding Triangle will be the largest measured move target.

• Expanding Triangle measure (subtracted from) Apex or wait for most aggressive option BD price = target
• Expanding Triangle measure = (swing high price of triangle (minus) swing low price of triangle)

Example Expanding Triangle as a bearish continuation pattern:

See the original article >>

Bull Expanding Triangle

By Tothetick Education

The Expanding Triangle as a price pattern presents in all markets, time frames, & price ranges.Interestingly there is some debate concerning this pattern. Some technicians feel this pattern is: very rare, strictly a reversal, strictly a trend continuation. As the debate continues, their versatility has made Expanding Triangles available as either a bullish or bearish trend continuation pattern or a reversal pattern depending on the trading environment in the background & the pattern is not hard to find. Regardless of when they present Expanding Triangles can be a very powerful pattern.

Visually the Expanding Triangle is characterized by a series of higher highs & lower lows regardless of when it presents. The shape of the Expanding Triangle is altered by the slope of the ascending resistance line & the slope of the descending support line which is ‘expanding’ or; inclining away from each other. The entire pattern can appear right-angled or tilted. The ‘tomahawk’ appearance of the Expanding Triangle is the mirror image or flipped in direction compared to the contracting symmetrical triangle. The Expanding Triangle pattern starts with the price action squeezed tightly in the Apex & as the pattern develops the price action swing high to swing low widens or spreads & therefore this pattern is also sometimes referred to as an ‘expanding apex’.

Expanding Triangles vary in their duration & are often quite large which offers nuances for traders during the development. They will have at least two swing highs & two swing lows in price. Traders should be prepared to adjust the trendlines as needed with additional swings. Overall volume usually diminishes as the pattern develops because traders become more & more unsure as to the market’s future direction. Eventually prices will break the immediate price range as outlined by the triangle extensions of support & resistance.

Traders can look to trade the Expanding Triangle in numerous similar methods regardless of market environment but with several nuances can ‘stack the deck’ which increases the risk-to-reward ratio for profits. The continuation pattern is one of the best performers statistically & the odds to trade an Expanding Triangle increase dramatically when traded with a controlling trend.

The bullish continuation pattern has 3 phases:

1) Background: A Strong impulsive, thrusting action with a surge in volume & price establishes a clear picture of the controlling bullish trend direction. In our expanding triangle price pattern it is represented visually by a Pole with a Tip. Higher and more drama the better as the Pole is the Key to recognizing the potential for the continuation of the pattern. The Pole represents trend direction as well as its strength & often this pattern is initiated as a new breakout in price from an established bullish base of support.

2) The second phase is a pause for consolidation of the action both in volume & price and is represented by the expanding triangle. As traders we like to see this phase very short in duration with only 2 or 3 swings while our price action is range bound maintaining the higher highs & lower lows shape and the volume is ‘resting’. The best breakouts occur at 50-75% of the triangle completion. Typically this pattern will have several intermediate failed efforts to reach either the support or resistance as outlined by the expanding triangle extensions. As with most patterns it benefits the trader to be aware of the ‘50-50’ or ‘muddy trench’ price area as outlined by the triangle apex. Traders should judge the risk:reward for entries based on the expectation with this pattern of the expansion of the price range with each subsequent swing in prices while zig-zagging through the apex line.

3) The pattern confirms as a bullish continuation pattern if the action creates a new bullish breakout with a surge again from the bulls in both volume & price. The immediate upper resistance outlined by the expanded triangle is the area traders look to see confirm the breakout. Typically the action will mimic the volatility & energy experienced with the Pole creation. Since during formation the expanded triangle has offered an increasing price range it is highly recommended to pay close attention to the volume after the breakout as an aid in recognizing further potential for the pattern. With large patterns where the definition of immediate support & resistance has been ‘widened’ in price, re-tests of the apex &/or breakout price are common before the trend can continue.

Options for Trading the Expanding Triangle as a bullish continuation pattern:

There are two methods of trading this pattern and it depends on your trading style.

Aggressive traders will enter trades right around the support trendline once sufficient support has confirmed. The concept is that the trend is on your side and the bulls are maintaining a higher level of support above the breakout. Early entry opportunities will exist but remember the concept of the pattern…the definition of support will be lower with each subsequent swing so give yourself room for a reward. Traders should closely monitor the S&R lines to anticipate price swing extensions. Stop placement can be fairly tight right below entry & the recommendation with this pattern is to refer to a larger time frame for additional confirmation. After entry stops can be adjusted upward accordingly.

Note the ‘mid-line’ created using the apex as the measurement. Traders can gauge success of the immediate swing &/or base profit targets on this incremental value. When price approaches the previous triangle swing high price & then the upper resistance line extension, you should gauge the momentum: if you see that the momentum is strong stick to the position. However, if you see that resistance prevails, close the trade & take your profits to maximize the reward. The reaction seen in volume in these areas is key.

The aggressive trading method can highly increase the profit potential of any triangle, as you can trade the same pattern several times & profit from the ranging swing movements inside the pattern. However, remember that as a trend continuation pattern traders want this consolidation triangle formation to be relatively brief. Two or 3 swings may turn into more with this triangle but the 50-75% formation concept aids trade consideration.

Conservative traders will enter a trade once the upper resistance line has been broken &/or the new breakout has confirmed.

Often as with many patterns, it may take a 3^rd effort.(inside trader note: #1 3 efforts increases trader observance #2 better range in price opportunities both directions also means better risk:reward & #3 markets often 'move' in 3's.)

False breakouts do happen and confirmation needed is always a traders’ choice. Several methods that apply here for either intrabar &/or close bar options offered in sequence: breakout above resistance price, retrace holds new support line, price clears breakout swing high price, larger chart combination.

Stop placement considerations can be aggressively raised after the breakout of the price.

Measured Move Targets based on structure of Pole & the Bull Expanding Triangle

Aggressive with Momentum & Volume: duplication of the original move or trader choice measurement of the Pole:

• Pole measure (added to) Apex or BreakOut price = target
• Pole measure = (Pole Tip price (minus) Pole Base price)

Aggressive with Momentum & Volume: swing action during formation of Triangle may offer several opportunities:

• Expanding Triangle measure (added to) /OR (subtracted from) Apex = target
• Expanding Triangle measure (added to) BreakOut price = target
• Expanding Triangle measure = (swing high price of triangle (minus) swing low price of triangle)
• Note: Long entry option with trend bias but, short options may be available based on trader’s definition of ‘room’ using the Apex & S&R extensions as the guide
• Recommend considering coordination with larger time frame & consider ...where is risk lower if able to use a tight stop worth reward potential.

Conservative: waits for at least 3 clear efforts or swings to establish Support.

Targets are measured the same regardless of trader style.

Often the widest Swing High to Swing Low of the Expanding Triangle will be the largest measured move target.

• Expanding Triangle measure (added to) Apex or most aggressive option add to BreakOut price = target
• Expanding Triangle measure = (swing high price of triangle (minus) swing low price of triangle)

Example Expanding Triangle as a bullish continuation pattern:

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Cool Video: Fracking--Costs and Benefits

by Marc Chandler

This Cool Video discusses the costs and benefits of fracking in about five minutes. It serves as a good follow up to this popular graphic we posted earlier this year explaining fracking.   It was posted on Visual.ly by Philipp Dettmer here.

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