Rising Wedge (Bearish Continuation or Reversal)
Introduction | Main Characteristics | Variations | Examples |
The Wedge is most often seen as a continuation pattern, although it does show up as a trend reversal pattern from time to time. This pattern shares a few qualities with the symmetrical triangle (general shape and duration) and a few others with the flag (slope/slant).
The typical wedge formation lasts between one and three months. It consists of two converging trendlines. So far, it sounds like a symmetrical triangle. However, the trendlines that comprise a wedge tend to slant away from the prevailing trend; in this manner it is like a flag. The two main kinds of wedges are falling (bullish) wedges and rising (bearish) wedges. (Read about the falling wedge).
In the case of the bearish wedge, a depiction of which is provided above, the pattern slants upwards (away from the prevailing bearish trend). Within the confines of a bearish wedge, price makes a series of higher highs and higher lows. Notice, however, that the support line that joins the lows has a slightly steeper upward slope than does the resistance line connecting the highs.
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 rising wedges often lead to precipitous declines over a short period of time and, although difficult to detect at first, can be very handy when spotted correctly.
Views differ on methods to be used in setting targets for a bearish wedge. There are traders who are of the opinion that a full retracement of the ground gained 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 S and DD depict a continuation and a reversal variant of the bearish wedge pattern, respectively.
Rising Wedge Continuation
S had been in the midst of a long-term downtrend when it found itself caught between two converging trendlines that were slanting upwards, contrary to the prevailing trend. The upper resistance line was slanting upwards at a shallower slope than that of the lower support line; such a pattern is recognized as a rising wedge. Price had been stuck within the pattern for just over 3 months - a somewhat lengthy period for the typical wedge - when a downside breakout occurred in early June.
As often happens during the formation of a wedge, trading volume trended lower as the pattern developed; the downside breakout was accompanied by a rise in trading volume, which is also typical. Rising wedges are often quoted as having the potential to "fall of their own weight". This formation did exactly that in mid-Jun when it gapped down a couple of points to make the short sellers very happy.
Rising Wedge Reversal
DD had been in the midst of an intermediate uptrend, rising from 33 in Mar to 41 in Jun. On reaching that level, price started to trade inbetween a couple of upward-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 was generally tepid during the formation of the pattern but then surged as price broke the lower support line, in the process initiating a new intermediate downtrend. A mere three weeks after the breakout, the stock had declined over 10%, from 41.5 to 37. A rare rising wedge reversal pattern had made its presence felt.
