A bearish reversal pattern formed by two assembled upward slants is called a rising wedge. To validate rising wedge there must be oscillation between the two lines. These lines must be touched at least twice for validation.

The pattern indicates the shortness of buyers. This one is identified by a continuous reduction of the amplitude of the waves. The lowest will be reached during the first correction on the resistance of the wedge and will form the support. The second wave of increase will then occur, however with lower amplitude, which may appear the weakness of buyers. Another wave will be formed thereafter but prices will increase less and less at the contact with the support. Volumes will then be at their lowest and constantly decrease as the waves. This movement then has almost no buying power which will indicate the willingness of a bearish reversal.

The target price is given by the lowest point that resulted in the formation of the wedge.

Below is a graph representing a rising wedge:

Take a look at some statistics about the rising wedge:

– In 82% of cases, there will be a downward exit.
– In 55% of cases, the rising wedge shows a reversal pattern
– In 63% of cases, the goal of the pattern is reached once the support is broken
– In 53% of cases, a pullback arises on the resistance
– In 27% of cases, false breakouts occur

Note the spacing between each contact point the lines must be important otherwise it could be a pennant.

The more that the trend lines are sloped, the more the downward movement will be violent.

False bearish breakouts provide an indication on the side of the exit because in only 3% of cases, when a bearish breakout occurs, the price will go out of the wedge by the top. The risk of running a false bearish break out is quite low.

An upward retracement is normally two times faster than the formation of the wedge.

Pullbacks will be harmful to the performance of the pattern.

A break point is normally located around 60% of the length of the rising wedge.

Rising Wedges that are large will give better performance than narrow wedges.

Stock charts print different topping formations. Some are classics, like the Descending Triangle, which can be understood and traded with little effort. However the emotional crowd additionally generates many undependable patterns while greed slowly evolves into mindless fear. Complex Rising Wedges will challenge a technician’s best effort at prediction while the unusual Diamond pattern burns trading capital swinging randomly back and forth.

Skilled traders refrain from these fruitless positions and will only look for profits where the odds strongly favor their play. First they’ll locate a common feature discovered in most topping reversals. Price draws at least one lower high within the broad congestion prior to violating a major uptrend. This common double top mechanism will become the focus for their trade entry. From this precise signpost it will follow the price to a natural breaking point and enter when violated.

Remember the Adam & Eve Bottom discussed earlier. This unique formation consists of a spiking first bottom, followed by a rounded second one. Flip the pattern around and you will see a highly predictive structure for trading these topping reversals.

This easy Adam & Eve Top gives traders frequent high profit short sales opportunities. Take note of this classic pattern in Quantum’s chart. The price never drew a third high prior to entering a significant bear market.

Successful Adam & Eve short sales may be entered on the first violation of the reaction low, regardless of an underlying trend. Use tight stops to prevent “turtle reversals.” They happen when sharp shorts covering rallies unexpectedly erupt right after the gunning of stops below a violation point.

Every uptrend produces positive sentiment that has to overcome the topping structure. Adam & Eve tops represents an efficient bar structure to succeed in this task. The violent reversal of Adam first awakens fear. Then the slow dome of Eve devours the remaining bull impulse while dissipating volatility needed to resume a rally. As the dome finishes, price moves swiftly to lower levels without substantial resistance.

Observant technicians recognize the mechanics of Descending Triangles and Adam & Eve formations in a lot of complex reversals. The vast majority of tops contain some characteristics of these similar patterns. Crowd enthusiasm will be eliminated for a decline to proceed. Through the repetitive failure of price to achieve new highs, buying interest eventually recedes. Then the market can eventually drop from its own weight.

Double Top Breakdown

Quantum’s 1997 multi-year high breaks down in a dramatic Adam and Eve Top. Pay attention to both volume and volatility readings to decline gradually through the formation of the second rounded high. Often, this “Eve” consumes more price bars than the “Adam” that precedes it.

A bullish reversal pattern formed by two diverging downward slants is a descending broadening wedge. To validate an descending broadening wedge, there has to be an oscillation between the two lines. Each line has to touch at least twice for this validation.

The pattern will mark the shortness of sellers. It is characterized by a progressive reduction of the amplitude of the waves. Actually the pattern appears like a bearish channel on which the slope of the resistance is becoming straight as far as the movement moves forward. In this pattern, the trend is bearish but sellers are attempting to retain control.

The target price is given by the lowest point that results in the formation of the wedge.

Look at the graphical representation of a descending broadening wedge:

The formation, ascending broadening wedge is called this because of its similarity to a rising wedge formation and then has a broadening price pattern.

While symmetrical broadening formations have a price pattern that revolves about a horizontal price axis, the ascending broadening wedge differs from a rising wedge as the axis rises.

The upper trend line of an ascending broadening wedge goes upward at a higher rate than the lower one, thus creating an apparent broadening appearance. The ascending broadening wedge formations volume is likely to increase ever so slightly as the breakout advances.

The patterns are very trustworthy once a downside break happens, however they are less reliable prior to the break of the lower trend-line. Thomas Bulkowski’s Encyclopedia Of Chart Patterns notes the failure rate for this pattern formation is 24%, however only 6% where a downside break occurs, suggests that once the downside break happens there is a possibility that a price recovery and a continued decline should be expected.

Once the decline begins prices will most often decline to, or below, the start of the formation.

The two sloping trend lines are the most obvious thing you will notice; the upper one will have a slightly steeper slope than the lower one and the trend lines will then spread out over time while both slope upward. When prices break through the lower trend-line they will tend to drop quickly.

Price movement is contained and alternates between the two non-parallel trend-lines. This is indicated in the below chart.

On many occasions, these formations will appear towards the end of a rising price trend and signal a reversal. A partial rise does not predict a change in trend.

There are quite a number of characteristics that will be unique to ascending broadening wedge formations;

• The upwardly tilted megaphone shape.
• Both upper and lower trend-lines will slope higher.
• The upper trend-line will have a higher slope than the lower one, giving the appearance of a broadening formation.
• Each trend-line should have a minimum of three touches, or close to that.
• Volume normally rises as prices move up and declines as prices move down.
• Volume tends to rise over time in most cases.

If prices do break the lower trend line, the price action may be chaotic and occasionally runs straight through the lower trend-line without even pausing on the way through. The average decline of a confirmed pattern is about 20%

In the case of a partial rise going towards the end of the pattern, prices start moving upward, after having found support at the lower trend-line, then stop prior to touching the upper one. Prices will immediately return to the lower trend-line and normally head lower, breaking towards the downside.

In Thomas Bulkowski’s Encyclopedia Of Chart Patterns, only 6% of the formations breaking out downward will fail to continue moving down by more than 5%. This is an exceedingly low figure. Also there is a 76% chance that the formation will break out downward. It therefore pays to wait for a confirmed breakout.

The measure rule for this type of formation will differ from most other formations in that it will be based on the lowest daily low, not on the height of the formation. The low serves as the expected minimum price move.

Again this formation is a good account for downside breakouts. About 1 in 5 will see prices movement horizontally or even break out upward. Holding out for the downside break is the favorite  approach and considerably increases the possibility of a profitable trade.

When prices begin to decline below the lower trend-line, think about a short position and then be prepared to cover when prices approach the target or at the next closest level of price support.

Provided that you identify a partial rise, consider taking a short position since around 8 of 10 cases show a downside breakout following a partial rise, because you will have a ‘heads up’ profits should be larger. If this approach is taken, as the trade advances the lower trend-line, consider tightening your stop-loss in case price reverses, thereby protecting your position.

The Dow Jones Industrial Average’s bearish Rising Wedge stayed consistent since the previous time it was shown in April 16’s Dow: Bullish or Bearish?

This is the Dow’s updated bearish Rising Wedge in the framework of the 2-year chart that gives us strong reason to trust that the long-term answer to the question will be quite different from the recent bullish reversal of what had been a near-term downtrend.

Take a look at what the bearish Broadening Top can do in the weekly chart on the following page that does not show the week’s rise.

Perhaps the recent Broadening Top and just a fractal footprint of the larger Rising Wedges that top into Broadening Tops, will somehow avoid both the Broadening Top and the far more bearish Rising Wedge, however there are several good and relatively current chart history suggesting this is not likely.

This is especially valid when the Dow’s recent Broadening Top is pulled apart just around today’s outside candle since it is not known whether it will turn into an outside reversal even though this seems likely.

Particularly if the Dow’s big Broadening Top consists of bearish Rising Wedges that achieve in bullish Falling Wedges and vice versa but with the bearish nature of the pattern indicating that the Rising Wedges will win ultimately as does the small Broadening Top created today on the outside candle with a pattern that confirms at 13175 for a target of 13011.

The pattern is a helper to the current Rising Wedge inside the larger Broadening Top. It confirms the same level but for a current target of 12083 and not quite sub-12000; that had been guessed at earlier.

A reason to assume it will not go sub-12000 as a formal target, even though the Dow may have a Rising Wedge shown on the first page, is the smaller Broadening Top appears to be the apex of the smaller Broadening Top in trading that seems uncannily like last July into August.

The first small Broadening Top resembles the current one in relation to its Rising Wedge at that time and suggests there may be some other sideways trades ahead prior to the resolution. If the comparison carries on into resolution, it is apparent that it will be a bearish and not a bullish resolution.

Consider the current Broadening Top is more compact than the prior one, the reason for drawing the intermediate-term trend-lines differs in the second chart. There is a valid reason to know that such a resolution will not require much more sideways trading before it displays what could be a 10% drop in the big Broadening Top alone. Not to say the multi month Rising Wedge that delivers a 10405 target for a potential decline of 22% and another correction in the many corrections and rallies of the longer 2-year sideways trend.

One should not assume that the Dow’s Broadening Top will do as it expected or as its prior Broadening Tops has done with the potential for the promise of some liquidity.  Liquidity slosh is always possible to cause this pattern to do something unique than what it normally does and that means treating both sides even though this pattern breaks to the downside nine times out of ten.

It’s an unlikely upside scenario, but confirms at a seemingly ridiculous 13692 for an even more outlandish target of 14673 and that would be an all-time high with its downside scenario confirming 12711 for the aforementioned target of 12083.

After the dissection of the Dow’s bearish Broadening Top, it appears more likely that it too will do as its bearish brethren have done before it which equates to a 200-DMA-crossing drop.

The right-angled and ascending broadening chart pattern is not one you might choose to trade. Other chart patterns perform much better. Downward breakouts have a big break even failure rate which may disqualify them from your trading tools. Upward breakouts have only a middling average rise, and that is if you trade them perfectly.

Would you trade a pattern with a likely profit potential of 10% or less? Perhaps a bearish chart pattern would appear, and the measure rule for that formation implied a downturn from 2700 to 2550, would you consider pursuing it further?

Some of these queries came up when the megaphone-like formation in the Dow Jones Transportation Average was noticed over the last two months. This compilation, with a flat, horizontal bottom and a progression of higher highs as well as a up-sloping trend line, is known as a right-angled broadening formation. Since the pattern is registering higher highs, it is referenced as an ascending broadening formation. However often “ascending” is a bit of a misnomer. Right-angled ascending broadening formations are bearish beasts.

Prior to taking a closer look at the pattern developing in the DJTA, more can be said about right-angled ascending broadening formations. Unlike other chart patterns, right-angled ascending broadening formations have an variable volume trend during the development of the formation, after all a volume surge on the breakout is common. While premature breakouts (upside or downside) tend to be isolated, pullbacks to the horizontal trend line are quite common. Also common are “partial rises” during which prices move toward the up-sloping trend line. These “partial rises” can be indications for a coming breakout, especially on the downside.

Fixed support at 2700 and higher highs in November and December establish this right-angled, ascending broadening formation. The declining relative strength also conveys a bearish retreat for the DJTA. Graphic provided by: MetaStock.

These characteristics are evident with the right-angled ascending broadening formation in the DJTA. The series of higher highs is present; the up-sloping trend line connects the highs of November with those of December. Also notice the steadfastness of the horizontal trend-line, which is hardly penetrated during the pattern’s development over the past two months. The “partial rise” phenomenon also seems to be effected, as the mid-December rally seems to have topped out at 2900.

Possibly one of the reasons why it is recommended that this formation is probably less beneficial has to do with waiting for the downside breakout. In the chart, a downside breakout would suggest a penetration of the horizontal line at 2700. The measure rule for right-angled, ascending broadening formations is sort of prudent, simply measure the distance from the highest high in the formation to the horizontal line at the bottom of the formation, then subtract that value from the horizontal line’s value. In this case, the formation’s high is at about 3000, while the horizontal line at 2700. This should give a formation size of 300 and cause a likely decline to as low as 2400.

The symmetrical broadening bottom is a bullish reversal pattern. The pattern is formed by two symmetrical horizontal lines that are divergent. So it is a inverted symmetrical triangle or an open triangle. The oscillations between the two bands of the triangle are therefore becoming more and more sizable. Each line must be touched at least twice for validation.

The symmetrical broadening bottomshows the growing nervousness of investors but also their indecisiveness. If the pattern is not identified quickly, the movement may seem totally random and thus trapping many investors.

The formation of this pattern should be preceded by an upward movement. This pattern is often due to cheap purchases that will form new highs. However, selling pressure remains strong and the indecisiveness is dominating.

The target price is given by plotting the height of the triangle at its start on the breakpoint. Another technique is to extend the maximum height of the triangle on the breakpoint

Here is a graphical representation of a symmetrical broadening bottom:

Broadening Bottom Example

The associated figure shows an example of a broadening bottom chart pattern on the daily scale. Price begins the broadening bottom at A and forms diverging peaks and valleys. At the end of the broadening bottom, C, a partial decline occurs which correctly predicts an upward breakout. This allowed astute traders early entry.

Notice that if you draw the top trendline to connect point B instead of C, the pattern would take on the appearance of a right-angled and descending broadening formation because the top trendline would be flat or nearly so. Also, price at E bounces to D and then makes a lower low at F. Point D looks like a partial rise which fails when the predicted breakout at F does not occur. This is one example of why trading broadening bottoms for profit is difficult, even if relying on a partial decline or partial rise.