sorenkg, What is the source for this information? Thanks...
What is a Rising Wedge Pattern?
The Suckers' Rally (from baresearch)
Rising wedge formations are very similar to other triangle patterns in that they are characterized by narrowing price ranges and slowing volume. There is one important difference, unlike symmetrical and right angle triangles, rising wedge formations almost always result in large price declines.
Many bearish technical patterns are about deception and this is particularly true for the rising wedge. Because this pattern features gradually higher stock prices many investors will jump to the incorrect conclusion that the stock is acting well from a technical perspective. The problem is that every rally is more feeble than the last -- as prices rise the interest in owning the stock at higher prices diminishes. The first point in the formation of this pattern, the reaction high usually occurs after a news event such as a new product, earnings report or litigation win. These events often lead to sharp imbalances between supply and demand and much fanfare from the Wall Street brokerage community but this point (a) is the height of bullish enthusiasm. In most cases the buying will be met almost immediately by strong selling pressures as many professionals use the rally to unwind existing long positions. This selling leads to a steep decline (b). As the stock declines the Wall Street brokerage community will often "dig-in" and a series of new buy recommendations usually follows. After several weeks the stock will begin to move higher but volume remains extremely weak. Slowly the stock moves to a new high amid much fanfare but very little volume (c). The new high should entice new buying from bulls but weak volume means that many traders remain wary. After several sessions of narrow price action the stock will again falter on increasing volume. Professionals are selling despite the barrage of new "buy" recommendations and in just a few sessions the stock will move drastically lower (d). Once again the Wall Street brokerages rally around the stock with aggressive new price targets and glowing recommendations. The stock begins to move higher but the move is gradual and most important, volume remains very slow. After several sessions the stock will may make yet another new high (e) but sellers are equal to the task. Within days the stock begins to move drastically lower on improved volume. Professionals continue to distribute existing long positions and beginning taking new short positions as they sense that demand is evaporating. It is at this time that Wall Street analysts become less vigilant, there are fewer new "buy" recommendations and the stock collapses as buyers are overwhelmed by sellers. The most vocal Wall Street analysts may offer new recommendations into this decline but ultimately their efforts prove futile and a lasting decline ensues.
The pattern of higher highs and rising lows should be positive but the volume divergence during this process is a "tip-off" that something is amiss. The most important factor to remember is that rising wedges are distributive patterns. Although the news that is pushing the stock higher may be bullish, weak volume is an indication that professionals are not buying, indeed, these investors are using strength to unwind existing long positions and establish new short positions. When professionals sell good news it is usually indicative of future weakness and it is just a matter of time before this pattern leads to drastically lower prices.
from Edwards & Magee
...It normally takes more than three weeks to complete...prices almost always fluctuate within the wedge's confines for for at least two-thirds the distance of the base (beginning of convergence) to the apex; in many cases, they rise clear to the apex, and in some actually go a short distant beyond, pushing on out at the top in a last gasp rally before collapsing. Once prices break out of the wedge downside, they usually waste little time before declining in earnest. The ensuing drop ordinarily retraces all of the ground gained within the wedge itself, and sometimes more. Trading volume on the wedge tends to follow the regular triangle pattern, diminishing gradually as the prices move up toward the apex of the wedge."
They usually take more than three weeks to complete and are seldom longer than three months.
"...we might add that the rising wedge is a quite characteristic pattern for Bear Market Rallies. It is so typical in fact that frequent appearance of Wedges at a time when , after an extensive decline, there is some question as to whether a new bull trend is in the making, may be taken as evidence that the Primary Trend is still down." |
