The Falling Wedge Pattern
The Falling Wedge pattern is a bullish chart pattern that forms with a wide formation at the top and contracts as the pattern matures. The overall price action forms a down-sloping wedge as the support and resistance trend lines converge.
Contrary to the symmetrical triangle, which shows no obvious slope (bullish/bearish bias), the falling wedge shows an obvious slope to the downside and hold a bullish bias. Though the pattern is typically a signal of reversal, continuation of the downtrend is still a possibility. You can find these patterns pretty easy with the help of today’s scanners like Trade Ideas and finviz.
What to Look For In a Falling Wedge
When present as a continuation pattern, the wedge will slope to the downside, but the down-slope is within an uptrend. Here is an example SPY’s 5 min chart:
When present in as a reversal pattern, the falling wedge pattern will slope to the downside within a downtrend. Falling wedges are bullish patterns. Below is an example of a reversal, also shown on SPY 5 min chart:
Falling Wedge Pattern Formation
Established Trend: To qualify as a reversal pattern, there must be a prior trend to reverse. Ideally, the falling wedge pattern will form after an extended downtrend and mark the final low. You can find these patterns on nearly every time frame.
Upper Resistance Line: It takes at least two reaction highs to form the upper resistance line. Each reaction high should be lower than each previous high. Both the support and resistance lines are label on PYPL daily chart below:
Lower Support Line: At least two reaction lows are required to form the lower support line. Each reaction low should be lower than each previous low.
Range Contraction: The range contraction of the falling wedge pattern is similar to that of the rising wedge, but with a flip of the chart. The upper resistance line and lower support line converge to form a downward sloped cone as the pattern matures. If there is no slope in the overall formation, it may be a symmetrical triangle. Each reaction low still penetrates the previous low, but this penetration becomes shallower. The shallower lows indicate a decrease in selling pressure. This creates a lower support line with less negative slope than the upper resistance line.
Resistance Break: Bullish confirmation of the pattern does not come until the resistance line breaks in convincing fashion. Similar to other pattern breaks, once the pattern breaks, there can sometimes be a correction to retest the former resistance, now turned support. The same PYPL’s daily chart can be used to show an example of a retest.
Volume: While volume is not vital during the formation of the falling wedge, it is an essential ingredient to confirm a falling wedge breakout. If the volume is weak, the breakout will lack conviction and be vulnerable to failure. Avoid going long if the volume is weak.