The Rising Wedge Pattern
The Rising Wedge pattern is a reversal pattern that occurs on the highs. While bearish in nature, it forms with wide price action at the base and then contracts as price action moves higher and the range of trading narrows. A bearish divergence in momentum accompanies the formation.
Contrary to the symmetrical triangle, which shows no obvious slope and therefore no bullish/bearish bias, the rising wedge pattern shows an obvious slope to the upside and holds a bearish bias. Though the pattern is typically a signal of reversal, the uptrend’s continuation is still possible. Even after the pattern has broken to the downside as it should, a single retest of the former support (demand) line alone can break the wedge’s highs and take price action higher.
When present as a continuation pattern, the rising wedge will slope to the upside. However, we typically find the up-slope within a larger downtrend.
When present as a reversal pattern, the rising wedge will slope to the upside within an uptrend. Regardless of continuation or reversal, rising wedges are always bearish patterns.
What to Look For In a Rising Wedge Pattern
Trend Established: As with any reversal, there needs to be an established trend to reverse. The rising wedge pattern can form on any time frame to mark a reversal. The odds of a breakdown are at 69%, leaving only 31% odds of a break to the upside. A confirmed break to the upside will likely result in a channel up formation rather than the wedge. At times the rising wedge pattern may consume the entire trend. While at other times, the pattern forms after an extended advance.
Resistance Line: We need at least two highs to draw the upper resistance trend line. For the rising wedge to be a valid pattern, the stock price should be creating higher highs.
Support Line: We need at least two lows to draw the lower support trend line. The stock price should be creating higher lows for the pattern to be valid.
Price Action Contraction: The distance between the resistance and support lines will contract as the pattern matures. Each advance (or bounce) from the support line becomes smaller and smaller, making the rally much less convincing. As a result, the upper resistance line fails to keep pace with the lower support line’s slope, therefore indicating a supply overhang as the price increases.
Break in Support Line: Confirmation of a bearish move is when the support line breaks and the candle for the current time frame closes below the uptrend. If you want to play it safer, wait for a break of the previous higher low. Once this support is broken, there may be a reaction rally to retest the newfound resistance level (broken support line), as shown below on AAPL 5 min chart.
Volume: In the ideal rising wedge pattern, volume declines as the price rises and the wedge forms. A surge in sell volume during the break of the support line can be accepted as confirmation of a bearish breakdown. The loss of momentum to the upside on each new high gives the pattern it’s bearish bias. The final break in support signals that the overall forces of supply have won and lower prices are probable. Contrary to the Ascending Triangle and Symmetrical Triangle, there are no techniques for measuring to estimate the total decline. Additional analysis should be conducted to forecast the price target.
Below is an example of a rising wedge pattern from TREE:
Executing the Trade
Entry Signal: An entry signal is given when price breaks the wedge’s support line to the downside. Again, odds are at 69% that the pattern will breakdown. However, to reduce risk, wait for the breakdown before entering a trade. These wedges need to confirm; otherwise, they could be channels as they continue to hold.
You can find rising wedges easily with the help of sites like Finviz. Head over to their screener and adjust the preferences as you see fit.