Rising Wedge
The Rising Wedge is a bearish
pattern that begins wide at the bottom and contracts as prices move higher and
the trading range narrows. In contrast to symmetrical triangles, which have no
definitive slope and no bullish or bearish bias, rising wedges definitely slope
up and have a bearish bias.
While though this article will
focus on the rising wedge as a reversal pattern, the pattern can also fit into
the continuation category. As a continuation pattern, the rising wedge will
still slope up, but the slope will be against the prevailing downtrend. As a
reversal pattern, the rising wedge will slope up and with the prevailing trend.
Regardless of the type (reversal or continuation), rising wedges are bearish.
Prior Trend: In order to qualify
as a reversal pattern, there must be a prior trend to reverse. The rising wedge
usually forms over a 3-6 month period and can mark an intermediate or long-term
trend reversal. Sometimes the current trend is totally contained within the
rising wedge; other times the pattern will form after an extended advance.
Upper Resistance Line: It takes at
least two reaction highs to form the upper resistance line, ideally three. Each
reaction high should be higher than the previous high.
Lower Support Line: At least two
reaction lows are required to form the lower support line. Each reaction low
should be higher than the previous low.
Contraction: The upper resistance
line and lower support line converge as the pattern matures. The advances from
the reaction lows (lower support line) become shorter and shorter, which makes
the rallies unconvincing. This creates an upper resistance line that fails to
keep pace with the slope of the lower support line and indicates a supply
overhang as prices increase.
Support Break: Bearish
confirmation of the pattern does not come until the support line is broken in a
convincing fashion. It is sometimes prudent to wait for a break of the previous
reaction low. Once support is broken, there can sometimes be a reaction rally
to test the newfound resistance level.
Volume: Ideally, volume will
decline as prices rise and the wedge evolves. An expansion of volume on the
support line break can be taken as bearish confirmation.
The rising wedge can be one of the
most difficult chart patterns to accurately recognize and trade. While it is a
consolidation formation, the loss of upside momentum on each successive high
gives the pattern its bearish bias. However, the series of higher highs and
higher lows keeps the trend inherently bullish. The final break of support
indicates that the forces of supply have finally won out and lower prices are
likely. There are no measuring techniques to estimate the decline – other
aspects of technical analysis should be employed to forecast price targets.
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