Reversal Patterns 3 : The Wedges

The wedge pattern is more like a symmetrical triangle pattern, the only difference is that it has converging trendlines which slat in either upwards or downward direction. There are two main types of wedges – falling and rising. A falling wedge slopes downward-it is a bullish pattern. In a falling wedge, the upper (or resistance) trendline will have a sharper slope than the support level in the wedge construction. The lower (or support) trendline will be clearly flatter as you can see in the figure given below. The stock prices tend to move between the resistance and support lines formed with a downward bias. The price movement in the wedge should at minimum test both the support trendline and the resistance trendline twice during the life of the wedge. The more times it tests each level, especially on the resistance end, the higher quality the wedge pattern is thought to be. The buy signal is formed when the price breaks through the upper resistance line. This breakout move should be on heavier volume, but due to the longer-term nature of this pattern, it’s important that the price has successive closes above the resistance line.

Example of falling wedge:

Conversely, a rising wedge is a bearish pattern. A rising wedge slopes upward. The upper (or resistance) trendline will have a flatter slope than the support level in the wedge construction. The lower (or support) trendline will clearly slop sharp as you can see in the figure given below. The stock prices tend to move between the resistance and support lines formed with a upward bias. The price movement in the wedge should at minimum test both the support trendline and the resistance trendline twice during the life of the wedge. The more times it tests each level, especially on the support end, the higher quality the wedge pattern is thought to be.

Example of a Rising wedge:

You may like these posts:

  1. Reversal Patterns 1 : Double tops and double bottoms
  2. Continuing patterns 2 : Triangles
  3. Reversal Patterns 2 : Head and Shoulders

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