![]() ![]() For those who bought during the most recent dip, they are suddenly in the happy position of having a profitable stock, and for longer-term purchasers, their losses have at least trimmed down and they see that the stock may have finally changed from a downtrend to an uptrend. The big change takes place when the resisting trendline is at last broken. ![]() With each successive dip and rise, holders of the stock are on a roller coaster that alternates between despair and hope, and the volume typically will try up as fewer and fewer people are interesting in hang on to a stock going through these gyrations. Those that remain are either more patient with the stock’s downdraft or simply acquired the stock at a newer, lower price.Įach drop down to the supporting trendline acts to scare out the weaker hands of the security, and each push higher to the resisting trendline acts to give owners of the stock hope that things are going to turn out. Whether the overall direction of the stock is bullish or bearish, the descending wedge behaves as a “clearing out” of the owners of the stock that are not inclined to hold on during a downturn. The breakout was given extra credence by the gap up in price that happened about a month afterward Psychology Behind the Pattern In either case, a breakout from above the descending wedge is considered bullish. If the stock is in a broad uptrend, the descending wedge is a continuation pattern if the stock is in a broad downtrend, the descending wedge is a reversal pattern. Whether or not the stock is in a general uptrend or downtrend doesn’t matter. As long as the price bars between the lines are moving lower (hence “descending”) and the lines are angled such that they will eventually converge on their right side (hence “wedge”), the pattern is valid. ![]() The descending wedge is bounded by these two lines. The two trendlines look parallel, but the higher one is descending at a slightly faster rate than the lower one. The graph of FEI Company went up 56% after its breakout from the descending wedge pattern. If and when the prices break the upper trendline, the descending wedge pattern is complete, and the stock should move higher in price. As the price bounces up and down between the two extremes, the price action becomes more compressed as the bullish and bearish reactions drawn the lines closer together. It consists of two non-parallel lines which, if extended, will meet on the their right side. Just as an ascending wedge is a bearish pattern, the descending wedge is a bullish pattern. This is sometimes the case, but there are some instances where the stock is in fact creating a very bullish pattern known as the descending wedge. Longer trends will often create designs other than a wedge or a flag.Usually when a person is watching a stock’s price steadily sink, the assumption is that the stock must be in trouble. A typical wedge or flag lasts longer than one month but less than three months. Since the data creating the design is typically slanted against the current trend, a descending flag is considered a “bullish” indicator, while a wedge is viewed as a “bearish” predictor. A bullish signal occurs when prices break above the upper trendline. This is because prices edge steadily lower in a converging pattern i.e. Unlike the Triangles where the apex is pointed to the right, the apex of this pattern is slanted downwards at an angle. A bearish signal occurs when prices break below the lower trendline.Ī Bullish Wedge or Flag consists of two converging trend lines. This is because prices edge steadily higher in a converging pattern i.e. Unlike the Triangles where the apex is pointed to the right, the apex of this pattern is slanted upwards at an angle. ![]() The “falling wedge” is often called a “flag” since it more resembles a pointed flag more than a typical triangle.Ī Bearish Wedge, or Flag, consists of two converging trend lines. The wedge need not be upward facing and can easily be an inverted triangle. A wedge in the financial universe describes a triangular shape formed by the intersection of two trendlines, which form the apex. ![]()
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