Rising Wedge Pattern: Technical Analysis of Stock Charts

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Rising Wedge Pattern: Technical Analysis of Stock Charts

A rising wedge is a technical indication that indicates a reversal pattern that is common in bad markets. When the price advances higher, the pivot highs and lows converge into a single point known as the apex, this pattern appears on the chart. When combined with dropping volume, it might indicate a trend reversal and the continuance of the bad market.

In this post, we will discuss the rising wedge pattern and apply it to a historical example to demonstrate its use. While the example is from the past, the mechanics of identifying and trading this pattern are still the same today.

Key Takeaways

  • The rising wedge is a technical chart pattern that may be used to spot potential trend reversals.
  • The pattern appears as an upward-sloping price chart including two converging trendlines.
  • It is usually accompanied by decreasing trading volume.
  • Wedges can either form in the rising or falling direction.
  • A rising wedge is a bearish chart pattern that signals a possible breakout to the negative.

The Rising Wedge Pattern

Using two trend lines—one to link two or more pivot highs and one to connect two or more pivot lows—convergence is seen at the top right corner of the chart (see Figure 1).

Figure 2. Image by Sabrina Jiang © Investopedia2021

This design seems to be a bear flag (Figure 2).Figure 1 depicts a rising wedge on a 60-minute chart, while the daily chart indicates a bear chart pattern.

Figure 1. Image by Sabrina Jiang © Investopedia2021

There are a few markers that may be utilized during pattern generation to assess whether the pattern is true or a disguise.

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If the volume of this structure decreases as it continues, it is a good indicator. This is because it would reveal a divergence between price and volume, indicating that a reversal is possible.

The second indicator is how far the retracement has progressed since the start of the decline. If the move has proceeded well beyond the 50% Fibonacci level, this pattern may no longer be relevant. If it remains below that threshold, the pattern is still acceptable.

A Historical Case of the Rising Wedge

The market continued to fall in the days after the massive market collapse that occurred on February 27, 2007, until it reached bottom on March 5, 2007. From that day on, a widespread market rebound occurred, which lasted several days.

The Russell 2000 e-mini futures stood out, displaying a pattern that many technical experts would instantly identify as a bear flag or a rising wedge.

Figure 3. Image by Sabrina Jiang © Investopedia2021

The Breakdown

One feature that experienced traders like about this pattern is that once the breakdown occurs, the goal is attained swiftly. Unlike other patterns that need confirmation before entering a trade, wedges often do not require confirmation; they typically break and drop quickly to their goals.

Targets are often found at the start of the upper trendline or at the first pivot high to which the trendline is linked. The objective in our case was set at 773.69.

The short entry was made when the price broke the lower trendline at 786.0 on the closure of the bar that broke the trendline, as shown in Figure 4. It only took six hours to achieve the objective, as opposed to many days for the pattern to build prior to the collapse.

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Figure 4. Image by Sabrina Jiang © Investopedia2021

In this example, accurately spotting a rising wedge increased our chances, and happily for us, the trade met the objective, as illustrated in Figure 5 below.

Figure 5. Image by Sabrina Jiang © Investopedia2021

The Outcome

Figure 6 depicts the final outcome once the objective has been met. Despite the fact that the index continued to fall, we left the trade and began hunting for more rising wedge formations.

Figure 6. Image by Sabrina Jiang © Investopedia2021

Is a Rising Wedge Bullish or Bearish?

A rising wedge is a negative indication in general because it signals a probable reversal during an uptrend. Rising wedge patterns predict that prices will decline after a break through the bottom trend line.

How Reliable Are Rising Wedges?

The long-term value of technical patterns such as wedges is still being debated. Although there is no one sure indication for entrance or exit, research suggests that wedge formations provide reliable clues.

What Does a Rising Wedge Mean?

A rising wedge is a negative chart pattern that indicates a reversal following a bull run. A rising wedge is said to indicate an impending negative breakthrough. The pattern, like other wedges, starts broad at the bottom then compresses as the price rises and the trading range narrows. The signal, however, is the inverse of a collapsing wedge, which implies possible upside.

The Bottom Line

Rising wedges offer a low risk/high return ratio and are hence popular among skilled technical traders. There are several misleading patterns or patterns in disguise that may seem like rising wedges and should be avoided by investors. The only method to tell a real rising wedge from a phony one is to look for price/volume divergences and ensure that the failure is still below the 50% Fibonacci retracement.

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As seen by this historical case, when the breakdown occurs, the second objective is usually met quite rapidly.

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