Continuation patterns are exactly what the name implies. They are pauses within ongoing trends, not signals that the trend is ending.
In markets, we generally see two types of patterns, continuation patterns and reversal patterns. The key difference is frequency.
Reversals are rare because asset prices tend to trend. Continuation patterns are far more common. That’s simply how markets behave.
What’s interesting, and frankly a little ironic, is how investors react to this reality.
Even though most patterns resolve in the direction of the prevailing trend, people are constantly looking for tops – head and shoulders, major reversals, the end of the move.
Most of the time, they’re just staring at a pause, not a peak.
Right now, the Nasdaq is doing exactly that.
It’s consolidating within an ongoing uptrend and forming what most technicians would label a classic continuation pattern.
Under normal circumstances, that pattern would be expected to resolve higher.
And, most of the time, it does.
But today I want to focus on the part of the conversation that rarely gets discussed: what happens when continuation patterns fail.
When a pattern that’s supposed to confirm the trend instead breaks in the opposite direction, the implications can be severe.
Failed continuation patterns are among the most bearish setups in the market. That risk is worth understanding.
Let’s dive in.
Nasdaq’s Bullish Symmetrical Triangle
The Nasdaq hasn’t made a new high since October. That timing is worth remembering.
Just as we were being told that only a handful of Nasdaq stocks were holding the market together, those very names became the only ones that stopped going up.
Everybody was wrong. Again.
Below is a chart of the Nasdaq Composite, which includes all stocks trading on the Nasdaq exchange. We often compare it to the NYSE Composite, which continues to push to new all time highs.
While small caps, mid caps, and even micro caps have been making steady progress, the Nasdaq has been stuck in place.
So when does the Nasdaq get a turn again?
Look closely at the structure. The trend is still up, with price moving from the lower left to the upper right.
What has changed is the pace.
Since October, the Nasdaq has been consolidating through a series of lower highs and higher lows.
This is the textbook definition of a symmetrical triangle, a very common continuation pattern during ongoing uptrends.
An upside resolution would confirm the trend and mark the start of the next leg higher. In practice, not just in textbooks, that’s often exactly how these patterns resolve.
But there’s an important part of this setup that rarely gets discussed.
What happens when a continuation pattern doesn’t resolve in the direction of the underlying trend?
That’s where the real risk lives.
When Bullish Patterns Fail
Is the higher probability outcome that bullish continuation patterns resolve higher? Yes, absolutely.
But sometimes they don’t. And, when they fail, the consequences can be outsized.
Take a look at U.S. Treasury bonds back in 2016, using the iShares 20+ Year Treasury Bond ETF (TLT). I remember this setup vividly.
Bonds were in a clean uptrend. Prices began to consolidate in July, forming what looked like a textbook symmetrical triangle.
Everything about it suggested continuation. The pattern lasted into September.
Then it broke. And not higher, but lower. The result wasn’t a small dip or a false move.
It was a sharp and violent collapse:
Now, let me be clear: I’m not saying the Nasdaq is about to do that. Context matters. Markets are different. Assets are different.
What I am saying is this: When continuation patterns fail, they tend to fail loudly.
Right now, the higher probability outcome for the Nasdaq Composite is still an upside resolution, in line with the primary trend. That’s the base case.
Just understand what the market is telling you if it decides to do the opposite.
Because sideways is fine.
Higher is great.
Bull markets end when continuation patterns fail.
If that line gets crossed, price will tell us. I’ll be ready.
Stay sharp,
JC Parets, CMT
Founder, TrendLabs