The Falling Wedge




The falling wedge is a bullish stock pattern that begins wide at the top and contracts as prices move lower.

This pattern can also fit into the continuation category. As a continuation pattern, the falling-wedge will still slope down, but the slope will be against the prevailing uptrend. As a reversal pattern, the falling-wedge slopes down and with the prevailing trend.

Regardless of the type (reversal or continuation), falling-wedges are regarded as bullish patterns.




Falling wedge

Chart by MetaStock




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The following are key points in confirming the falling-wedge pattern:


  • Prior Trend: To qualify as a reversal pattern, there must be a prior trend to reverse. Ideally, the falling wedge will form after an extended downtrend and mark the final low. The pattern usually forms over a 3-6 month period and the preceding downtrend should be at least 3 months old.

  • Upper Resistance Line: It takes at least two reaction highs to form the upper resistance line, ideally three. Each reaction high should be lower than the previous highs.

  • Lower Support Line: At least two reaction lows are required to form the lower support line. Each reaction low should be lower than the previous lows.

  • Contraction: The upper resistance line and lower support line converge to form a cone as the pattern matures. Shallower lows indicate a decrease in selling pressure and create a lower support line with less negative slope than the upper resistance line.

  • Resistance Break: Bullish confirmation of the pattern does not come until the resistance line is broken with higher volume.

    The OBV Indicator can be used to confirm the break.



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Conclusion

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The falling-wedge can be one of the most difficult chart patterns to accurately recognize and trade. As with most patterns, it is important to wait for a stock breakout and combine other aspects of technical analysis to confirm signals.



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Recommended Technical Analysis Tools and Resources


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