Rising Wedge
Tue, Apr 15A rising wedge is a chart pattern created by drawing two upward-sloping trend lines, one for the highs and another for the lows. The upper trend line also ascends to the right but has a gentler slope compared to the lower trend line.
This pattern usually consists of at least five reversals: three touching one trend line and two touching the other. It is classified as a bearish reversal chart pattern. The slope of the trend line for the highs is less steep than that of the trend line for the lows, suggesting that the lows are increasing at a faster rate than the highs.
The resulting formation creates a gradually narrowing wedge, which is how this chart pattern gets its name. Despite the ascending nature of the trend lines, rising wedges are sometimes mistakenly viewed as continuation patterns within an overall upward trend.
The apparent upward price movement encourages bullish traders to keep buying, while bearish traders continue to sell, reinforcing the strong upper resistance line. As the price fails to breach this upper resistance level, buying pressure diminishes, leading to a breakdown below the lower support level and initiating a significant downward trend.
Therefore, a rising wedge should be interpreted as a strong sell signal and a sign that a trend reversal is on the horizon. It is the opposite of a falling wedge.
In the context of a downtrend, a rising wedge indicates a weak rally that typically results in a breach of the lower trend line, continuing the previous trend. While upward breakouts are less frequent, they can occur and are more likely than downward breakouts in falling wedges.
Be cautious when a rising wedge appears during an uptrend; its adaptable nature can transform it into a reversal pattern rather than a continuation pattern, as is often assumed. Breakouts are generally anticipated in the latter half of the pattern, closer to the midpoint. As the pattern develops, volume is likely to decrease, maintaining the structure as much as possible.
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