As an uptrend, a rising wedge starts as a rally to a new high on strong volume before many weeks of narrowing, range-bound trade. In this period, higher highs and higher lows will be seen with the volume contracting before a sharp break occurs on strong volume. Normally, this pattern won’t be seen on its own but rather as a smaller section of a larger trend. Therefore, the implications are modest and don’t have as much as an influence as others. By taking the breakout level and subtracting the overall height of the pattern, the technical targets can be established. In terms of the breakout level, this can be found by drawing a trend line from the first consolidation right through the reaction high.
As the title suggests, a rising wedge is normally bearish and normally makes an appearance in downtrends. Even when they are found in uptrends, they are still considered bearish. Both higher tops and higher bottoms are seen in this pattern and it is generally known as one of the hardest to recognise. As a result, it can be equally difficult to trade. As each high comes, there is a substantial loss of momentum which gives the bearish bias. On the flip side, the higher lows and highs suggest a bullish characteristic. When the final break comes, there is a suggestion that supply has overwhelmed demand and the prices will then decline. Because there is no way to guess how far the decline will go, other techniques need to be used.
Previous Trend - As with all the others, a prior trend needs to have been established for it to be considered a reversal pattern. Normally, a three to six month period is about normal for the rising wedge so can therefore mark a long-term reversal. Whilst the pattern will sometimes form after an extended advance, other times the trend will remain contained with the wedge itself.
Lower Support Line - For the lower support line to form, there needs to be two or more reaction lows with each low lower than the next.
Upper Resistance Line - In order to form the upper resistance line, there must be two or more reaction highs with each high being lower than the next.
Contraction - Eventually, both the lines will converge as the pattern matures. When it comes to the reaction lows, the advances become shorter which gradually makes the rallies insignificant and unconvincing. As a result, the upper resistance line cannot keep pace which therefore results in supply overwhelming demand.
Volume - In an ideal situation, the volume will decline as the prices rise. When the volume expands on the support line break, this is considered to be confirmation.
Support Break - Until the support line is broken convincingly, bearish confirmation will not occur. Generally, it is always better to wait for the break and a little after because there will sometimes be a reaction rally and this will then test the resistance level after the support is broken.