Falling Wedge

The Falling Wedge is a bullishpattern that begins wide at the top and contracts as prices move lower. Thisprice action forms a cone that slopes down as the reaction highs and reactionlows converge. In contrast to symmetrical triangles, which have no definitiveslope and no bias, falling wedges definitely slope down and have a bullishbias. However, this bullish bias cannot be realized until a resistance breakoutoccurs.

While this article will focus onthe falling wedge as a reversal pattern, it can also fit into the continuationcategory. As a continuation pattern, the falling wedge will still slope down,but the slope will be against the prevailing uptrend. As a reversal pattern,the falling wedge slopes down and with the prevailing trend. Regardless of thetype (reversal or continuation), falling wedges are regarded as bullishpatterns.

Prior Trend: To qualify as areversal pattern, there must be a prior trend to reverse. Ideally, the fallingwedge will form after an extended downtrend and mark the final low. The patternusually forms over a 3-6 month period and the preceding downtrend should be atleast 3 months old.

Upper Resistance Line: It takes atleast two reaction highs to form the upper resistance line, ideally three. Eachreaction high should be lower than the previous highs.

Lower Support Line: At least tworeaction lows are required to form the lower support line. Each reaction lowshould be lower than the previous lows.

Contraction: The upper resistanceline and lower support line converge to form a cone as the pattern matures. Thereaction lows still penetrate the previous lows, but this penetration becomesshallower. Shallower lows indicate a decrease in selling pressure and create alower support line with less negative slope than the upper resistance line.

Resistance Break: Bullishconfirmation of the pattern does not come until the resistance line is brokenin convincing fashion. It is sometimes prudent to wait for a break above theprevious reaction high for further confirmation. Once resistance is broken,there can sometimes be a correction to test the newfound support level.

Volume: While volume is notparticularly important on rising wedges, it is an essential ingredient toconfirm a falling wedge breakout. Without an expansion of volume, the breakoutwill lack conviction and be vulnerable to failure.

As with rising wedges, the fallingwedge can be one of the most difficult chart patterns to accurately recognizeand trade. When lower highs and lower lows form, as in a falling wedge, asecurity remains in a downtrend. The falling wedge is designed to spot adecrease in downside momentum and alert technicians to a potential trendreversal. Even though selling pressure may be diminishing, demand does not winout until resistance is broken. As with most patterns, it is important to waitfor a breakout and combine other aspects of technical analysis to confirmsignals.

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