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Strategies & Market Trends : Stock Attack -- A Complete Analysis

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To: Chris who started this subject	11/2/2000 2:39:26 PM
From: theniteowl	Read Replies (2) of 42787

What is a Rising Wedge Pattern? The Suckers' Rally By Salvator Martinez Technical Analyst Bedford and Associates originally posted 07/03/2000 baresearch.com 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. How are Technical Targets Derived? As with all technical patterns, it is very easy to calculate technical targets. For rising wedge formations the technical measure is vertical height of the triangle (difference between point (b) and point (a). This difference is then applied to the new breakout level to obtain a target. Vital Signs, When Technical Patterns Fail Symmetry is Important Although rising wedge formations are not truly symmetrical it is important that the pattern look like a wedge. If the pattern is characterized by boundary lines that slope in opposite directions (point (b) is greater than point (d) the formation may be a symmetrical triangle and the implications for that pattern are far different. Make certain the pattern you think you see is indeed that pattern and devise trading parameters accordingly. Volume is Vital The most important factor of any technical pattern is volume. It is very important that volume contract as the stock price rises. A rising stock price and declining volume is normally indicative of distribution. This means that fewer investors are being converted to bulls as the price increases. Eventually there will be no bulls left to support prices and the pattern should yield a downside breakout and a big decline in price. Pretty Pictures Make Good Trades Never underestimate the importance of the key aspects of a technical pattern. Generally, once the wedge yields an downside breakout the lower boundary line becomes key resistance. This level should not be penetrated from below. In some cases a stock will record a downside breakout, the price will decline 2-3% and then return to test resistance. An important factor to remember is that the slope of the bottom of the pattern is rising. This means that the resistance zone will also be rising. As long as the stock does not re-enter the wedge the pattern remains valid but if resistance fails for any reason short positions should be closed.

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