Continuation Wedge (Bearish)

Implication

A Continuation Wedge (Bearish) is considered a bearish signal, indicating that the current downtrend may continue.

Description

A Continuation Wedge (Bearish) consists of two converging trend lines. The trend lines are slanted upward. Unlike the Triangles where the apex is pointed to the right, the apex of this pattern is slanted upwards at an angle. This is because prices edge steadily higher in a converging pattern i.e. there are higher highs and higher lows. A bearish signal occurs when prices break below the lower trendline.

Over the weeks or months that this pattern forms the trend appears upwards but the long-term range is still downward.

Volume should diminish as the pattern forms.

Trading Considerations

• Pattern Duration

Consider the duration of the pattern and its relationship to your trading time horizons. The duration of the pattern is considered to be an indicator of the duration of the influence of this pattern. The longer the pattern the longer it will take for the price to move to the Target. The shorter the pattern the sooner the price move. If you are considering a short-term trading opportunity, look for a pattern with a short duration. If you are considering a longer-term trading opportunity, look for a pattern with a longer duration.

• Target Price

The target price provides an important indication about the potential price move that this pattern indicates. Consider whether the target price for this pattern is sufficient to provide adequate returns after your costs (such as commissions) have been taken into account. A good rule of thumb is that the target price must indicate a potential return of greater than 5% before a pattern should be considered useful. However you must consider the current price and the volume of shares you intend to trade. Also, check that the target price has not already been achieved.

Criteria that Support

• Volume

Volume should diminish as the pattern forms.

• Price moves below Support Level

You can also check that the prices following the pattern have also crossed below a support level such as a 200 day moving average. This would provide extra confirmation that the trend is poised to continue downward.

Criteria that Refute

• Price moves above Resistance Level

If post pattern prices have risen above a key resistance level such as a 200 day moving average, this could be a temporary retracement to the breakout level (which is common) or perhaps a sign that the previous bearish signal was actually a false signal - sometimes called a bear trap. When such a retracement is encountered, one helpful clue is to look at volume. If pricing retraced on high volume this may signify a failure of the original bearish pattern - sometimes leading to a potentially profitable bullish play. If there is not much volume, then it could simply be a temporary retracement and prices may change direction and continue downward after all.

• Rising or Stable Volume

Volume should diminish as the pattern forms. If volume remains the same or increases this signal is less reliable.

• Underlying Behavior

In this pattern prices edge steadily higher in a converging pattern i.e. there are higher highs and higher lows indicating that bulls are winning over bears. However, at the breakout point the bears emerge the victors and the price descends.