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Ending Diagonal: A Pattern That Sends Shivers Down Investors' Spines

Classic technical price patterns become "classic" because they are so often recognizable in financial markets over time.

Classic chart formations include the head-and-shoulders pattern, double top or bottom, triple top or bottom, ascending or descending triangle rectangles and diamonds.

Also consider the Elliott wave pattern called the ending diagonal. Frost and Prechter's Elliott Wave Principle describes this price formation (pp. 37-38):

An ending diagonal occurs primarily in the fifth wave position at times when the preceding move has gone 'too far too fast'. ... In all cases, they are found at the termination points of larger patterns, indicating exhaustion of the larger movement.

A contracting diagonal takes a wedge shape within two converging lines. This most common form for an ending diagonal (in a bull market) is illustrated [below] and shown in its typical position within a larger impulse wave.




This ending diagonal depicts a bull market, while an ending diagonal in a bear market is reversed.

Frost and Prechter continue discussing the ending diagonal:

A rising ending diagonal is usually followed by a sharp decline retracing at least back to the level where it began and typically much further.

With that in mind, look at this great example from the March 2007 Elliott Wave Financial Forecast, showing a textbook ending diagonal from December 2006 through February 2007 and its aftermath.



Tuesday’s violent downward reversal is the exact behavior one should see following the conclusion of an ending diagonal.