The falling and rising wedges are patterns that look for trend reversal.
Falling Wedge – A bullish pattern where the stock’s current downward trend converges to eventually break above the resistance to an upward trend.
Rising Wedge – A bearish pattern where the stock’s current upward trend converges to eventually break below the support to a downward trend.
Both patterns are comprised of a support and resistance. Obviously depending on which pattern you are observing that line will be of importance. For example, if you are looking at a falling wedge, then you expect the resistance to eventually be broken.
For best reactions, volume should be strong on breaks out of a falling wedge, but not a big deal on a rising wedge. Both patterns are not officially established until their trends have been broken.
With wedges, price targets are trickier to predict, but on average you can take a line from the highest high (falling wedge) and lowest low (rising wedge).
Concept in Action
Rising Wedge – The chart shows that the pattern started when the stock first hit the support. That spot will also be our price target if the pattern plays out (green line). The pattern was official once the stock broke below the support.
Falling Wedge – The chart shows that the pattern started when the stock first hit the resistance. So more than likely the pattern should conclude with a continuation of upward movement. Once the stock breaks out, we create a price target by drawing a line from the highest high or starting point (blue line).
Important Reminders and Notes
1. Falling wedge is bullish; Rising wedge is bearish.
2. Volume should be strong on falling wedge break.
While a favorite pattern of many, it is important to remember that the pattern is not officially set until a breakout has occurred.