ANALYZING CHART PATTERNS: THE WEDGE
The wedge chart pattern signals a reverse of the trend
that is currently formed within the wedge itself. Wedges are similar in
construction to a symmetrical triangle in that there are two trendlines -
support and resistance - which band the price of a security.
The wedge pattern differs in that it is generally a
longer-term pattern, usually lasting three to six months. It also has
converging trendlines that slant in an either upward or downward direction,
which differs from the more uniform trendlines of triangles.
There are two main types of wedges – falling and rising
– which differ on the overall slant of the pattern. A falling wedge slopes
downward, while a rising wedge slants upward.
Falling Wedge
The falling wedge is a generally bullish pattern
signaling that one will likely see the price break upwards through the wedge
and move into an uptrend. The trendlines of this pattern converge, with both
being slanted in a downward direction as the price is trading in a downtrend.
Falling wedge pattern
From the above, one can see that a wedge is similar to
the triangles, in that the price movement bounces between the two trendlines,
which are bounding the price movement.
Another thing to look at in the falling wedge is that
the upper (or resistance) trendline should have a sharper slope than the
support level in the wedge construction. When the lower (or support) trendline
is clearly flatter as the pattern forms, it signals that selling pressure is
waning, as sellers have trouble pushing the price down further each time the
security is under pressure.
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.
Rising Wedge
Conversely, a rising wedge is a bearish pattern that
signals that the security is likely to head in a downward direction. The
trendlines of this pattern converge, with both trendlines slanted in an upward
direction.
Rising wedge pattern
Again, the price movement is bounded by the two
converging trendlines. As the price moves towards the apex of the pattern,
momentum is weakening. A move below the lower support would be viewed by
traders as a reversal in the upward trend.
As the strength of the buyers weakens (exhibited by
their inability to take the price higher), the sellers start to gain momentum.
The pattern is complete, with the sellers taking control of the security, when
the price falls below the supporting trendline.
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