WESTERN TECHNICAL PATTERNS – PART 3

Uploaded by : DreamGains Financials, Posted on : 21 Oct 2015

 

 

  1. Falling Wedge

The falling wedge pattern is a bullish reversal pattern which is wide at the beginning from the top of the range and contracts gradually as the price moves lower. The price action exhibits a cone shape formation that slopes downwards by converging reaction highs and lows. As compared to symmetrical triangle which don’t have any particular slope, falling wedge have falling slope and bullish bias only with the breakout above the upper falling trend line which is formed by joining the peaks.

Though falling wedge can be a continuation pattern also within a larger uptrend. But still the slope of the pattern would be downwards and it would be the indication of smaller downtrend. Falling wedge will mark the significant low. Falling wedge pattern whether reversal or continuation is a bullish pattern and signals buying.

Prior Trend: With any reversal pattern, there has to be a prevailing trend to reverse. The formation of falling wedge would ideally be after an extended downtrend which marks the final low. The pattern usually takes a period of over 3-6 months to form and the prevailing downtrend should at least be 3 months old.

Upper Resistance Line: At least two reaction highs are required to form the upper resistance line, ideally it is three. Each reaction high should be lower than the previous high.

Lower Support Line: It takes at least two reaction lows to form the lower support line. Each reaction low should be lower than the previous low.

Contraction: The upper resistance line and lower support line converge to form a cone as the pattern completes. The reaction lows still penetrate the previous lows, but this penetration becomes shallower. Shallower lows indicate decreasing selling pressure and a lower support line with less negative slope than the upper resistance line is created.

Resistance Break: Bullish confirmation of the pattern does not come until the resistance line is broken in powerful fashion. It is sometimes advisable to wait for a break above the previous reaction high for clear confirmation. Once resistance is broken, there can sometimes be a correction to test the newfound support level.

Volume: Volumes are not much important in rising wedges, but it is an essential confirmation for falling wedge breakout. Without an expansion of volume, the breakout will lack conviction and be susceptible to failure.

 Pic1

In the above daily chart of ACC, the falling wedge was formed in the year 2014 where it took around 4 months to form and the target of which was almost achieved after the breakout.

Volumes expanded when the breakout happened which forms the perfect falling wedge. Though this falling wedge can be classified as continuation. As the short term downtrend or consolidation happened before. And, long term uptrend was existing at that point of time.

  1. Rising Wedge

The rising wedge pattern is a bearish reversal pattern which is wide at the beginning from the bottom of the range and contracts gradually as the price moves higher. The price action exhibits a cone shape formation that slopes upwards by converging reaction lows and highs. As compared to symmetrical triangle which don’t have any particular slope, rising wedge slopes upwards and have bearish bias only with the breakout below the lower rising trend line which is formed by joining the troughs.

Though rising wedge can be a continuation pattern also within a larger downtrend. But still the slope of the pattern would be upwards and it would be the indication of smaller uptrend. Rising wedge will mark the significant high. Rising wedge pattern whether reversal or continuation is a bearish pattern and signals selling.

Prior Trend: With any reversal pattern, there has to be a prevailing trend to reverse. The formation of rising wedge would ideally be after an extended uptrend which marks the final high. The pattern usually takes a period of over 3-6 months to form and the prevailing downtrend should an extended one.

Upper Resistance Line: At least two reaction highs are required to form the upper resistance line, ideally it is three. Each reaction high should be higher than the previous high.

Lower Support Line: It takes at least two reaction lows 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 to form a cone as the pattern completes. The rise from the reaction lows keeps on becoming shorter and reduced conviction of rallies is imminent. The pace of the upper resistance line keeps on decreasing as compared to rising support line indicates the rising supply.

Resistance Break: Bearish confirmation of the pattern does not come until the support line is broken in powerful fashion. It is sometimes advisable to wait for a break below the previous reaction low for clear confirmation. Once support is broken, there can sometimes be a bounce to test the newfound resistance level.

Volume: Volumes decline as the prices rise and wedge forms. And, an expansion of volume during breakdown from support will be a bearish confirmation.

 Pic2

In the above daily chart of ABAN OFFSHORE, the rising wedge took almost 6 months to form and after an extended uptrend from 200 to 900 levels. This wedge also marked the high of that stock which is currently trading at 230 levels in a year from that period.

Volumes were also confirming where during wedge formation volumes decreased as the formation progressed and volume expansion was seen during breakdown.

 

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