Falling Wedge (Bullish Continuation or Reversal)
Introduction | Main Characteristics | Variations | Examples |
The Wedge usually shows up a continuation pattern. However, on occasion it does bring about a reversal in trend. The pattern is characterized by two converging trendlines that slant away from the prevailing trend and it typically takes between one and three months to form. Accordingly, the pattern shares a few qualities with the symmetrical triangle and others with the flag.
Wedges are classified as falling (bullish) or rising (bearish), depending upon the slant of the pattern. (Read about the rising wedge).
In the case of the bullish wedge, a depiction of which is provided above, the pattern slants downwards (away from the prevailing bullish trend). Within the confines of a bullish wedge, price makes a series of lower highs and lower lows. Notice, however, that the resistance line that joins the highs has a slightly steeper downward slope than does the support line connecting the lows.
Volume levels typically decline during the formation of a wedge. However, it is crucial that a sharp increase in activity take place concurrent to the breakout or else there is the risk of a failure of the pattern. Successful falling wedges often lead to sharp rallies over a short period of time and, although sometimes difficult to detect at first, can be very handy when spotted correctly.
Views differ on methods to be used in setting targets for a bullish wedge. Some traders are of the opinion that a full retracement of ground lost during formation of the wedge is to be expected. Other traders use "flying at half-mast" rules and project the size of the preceding move from the breakout point, in arriving at a suitable target.
Wedges as Reversal Patterns
As mentioned earlier, the wedge typically appears as a continuation pattern and slants against the prevailing trend. Occasionally, a wedge can appear at the end of a trend and serve as a reversal pattern. Note that when it does show up as a reversal pattern, the slant is in the direction of the trend.
Regardless of whether the wedge appears during or at the end of a trend, the technician should be aware that the slant of a legitimate wedge is always opposite to that of the trend that follows the breakout. In other words, a downward sloping - Falling - Wedge is bullish and an upward sloping - Rising - Wedge is bearish.
The following illustrations of SYMC and DD depict a continuation and a reversal variant of the bullish wedge pattern, respectively.
Falling Wedge Continuation
SYMC had initiated an intermediate uptrend after bottoming at 3.50 in late-Dec. '00. Upon moving to 6.50 by the end of January the stock started to trickle lower, putting in lower highs and lower lows for the next 2 months. The upper resistance line was slanting downwards at a steeper slope than that of the lower support line of this pattern; such a pattern is recognized as a falling wedge.
Price traded within the two converging trendlines until the breakout (at 5.30) in early-April. Unlike the typical breakout, this one came without much of an increase in trading activity. Trading volume only increased once the primary target (the highest point during the formation of the wedge) of 6.50 was broken above. Less than two months later, the stock had replicated the $3 move into the pattern and was trading as high as 9.00.
Falling Wedge Reversal
DD had been in the midst of an intermediate downtrend, dropping from 45 in Jun to 36 in Sept/Oct. Right at the end of that period, price started to trade within a couple of downward-sloping (and converging) trendlines. The pattern certainly resembled a wedge but, unlike most wedges, was slanting in the direction of the prevailing trend (as opposed to against it).
Volume trend generally declined as price was trading within the pattern (as often occurs during a wedge formation). Finally, in mid-Oct, price broke out above the falling resistance line in a burst of trading activity and initiated a new uptrend. A mere two weeks after the breakout, the stock had rallied nearly 15% to 41. A rare falling wedge reversal pattern left the bulls with something to cheer about.
