Wedge Reverse
Wedge Reverse
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Growing Wedge
My notice of a growing wedge is technically confirmed whenever you assess the following: The robust volume, and over a number of weeks, it is a contracting range-bound trade. You will observe the higher highs and higher lows along with slowing volume. Usually what happens next is a distinct break lower on solid volume.
Why Does It Happen?
As with most reversal patterns a rising wedge scenario is no different. You have an up trend rally that at first observation appears to be in an upward direction with a series of higher highs and lower highs. The run of data from the media is jointly encouraging. The enquiry houses are out there raising their forecasts for the stock; this includes the share cost, earnings and 12 month targets. What is really happening is that the stock is being sold off to the retail investor. The experienced and institutional traders are selling off to the new mum and dad investors, the less clever or short term speculator. This is all about manipulation and deception.
The pattern embarks on a high profile or sentimental stock; it rises to a new high and proceeds upwards after strong volume. Trend trading and the exhilaration give to the rise in the surging share price. On the face of it the fundamental outlook appears solid.
As the share cost rises to a new high, uncharacteristically the volume retracts and the share prices decline rapidly to an answer low. The media and research analysts express us the stock is simply taking a breather; they support the sell off by requiting the long term advance. They restate their buy ratings once more. Then again the share price rises to an all time high BUT the volume deteriorates and the price begins to weaken. It is easy to understand at face value the bullish sentiment when the company rises, its guidance, wins lucrative contracts, develops new products and good media attention.
Consequently, underlying use is being carried out as the experience traders and long term investors sell their positions, they distribute their holdings on every good piece of information in the media - while the share price reacts to the downside. The low is higher than the late reaction low and forms the appearance of a wedge on the chart. Then after a number of sessions of consolidation more good news is released by the analysts and new wires. The share price again rallies to a new high.
During the preceding two rallies the volume is reduced which caused the share price to rapidly begin to weaken. Those same analysts who previously reported on the stock again remain resilient as there is no fundamental occurrence to account for the weakness
Again inquiry houses reiterate their purchase ratings, advising clients to buy and build on weakness. While the longer term experienced traders /investors are selling into the market.
By this time the recent advice has no effect and the rate declines rapidly. The media and research houses again promote their advice but to no avail. Before long the wedge pattern structures are breached
Almost immediately after, the support at the reaction level is violated. What happens succeeding is the news is quite negative and the inexperienced traders, the speculators and latest investors panic, the price plummets. After certain weeks the stock is trading back at its intermediate level of resistance.
About the Author
TradingLounge™.com.au and the TradingLevels™ Analysis Service have been developed by Peter Mathers to meet a growing demand for accessible, sensible education and his TradingLevels™-based analysis. Delivering high quality analysis and trades recommendations for shares, CFDs, day trading systems, indices, commodity, the TradingLounge™ has been in strong demand growing from strength to strength. Peter is author of "Trading CFDs in Today's Markets". If you want to know more about trading analysis, click here.