The Rising Wedge




The rising wedge is a bearish stock pattern that begins wide at the bottom and contracts as prices move higher and the trading range narrows.

This 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.



Rising Wedge




Chart by MetaStock




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


  • 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 with higher volume.

    The OBV Indicator can be used to confirm the break.



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Conclusion

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The rising-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 Stock Market Software

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