What Is a Falling Wedge?
The falling wedge pattern is an important trend that indicates a future upward trend. It is wide at the top and becomes narrower as the price falls. As the reaction highs and lows converge, the price action forms a cone that slopes downward.
When a market centralizes between two intersecting support and resistance lines, a falling wedge pattern forms. When the support and resistance lines point downwards, this is also an indication of a falling wedge. The slope of the resistance line must be greater than that of the support line.
The following are the key characteristics of the falling wedge:
- It has converging trend lines.
- It has a decreasing volume as the trend line advances.
- It is preceded by a breakout across the upper trend line.
It can be interpreted as a continuation or reversal formation on the trendline, depending on its location on the price chart. Both scenarios involve different market conditions that must be taken into account.
To distinguish continuation and reversal patterns on the trendline, look for the appearance of the falling wedge. If it appears in an uptrend, it is a continuation pattern; if it appears in a downtrend, it is a reversal pattern.
It denotes the end of the consolidation period. As a result, the falling wedge can be thought of like the silence before the storm. It signals buyers to regroup and attract new buying interests, which will be used to defeat the bears and push the price action higher.
Therefore, a falling wedge is an important technical formation indicating that the adjustment, or consolidation, has just been completed as the asset's price has left the wedge to the upside and, generally, the overall trend is continuing.
How Do You Spot a Falling Wedge?
The first step is to determine whether there exists an uptrend or a downtrend. Then, with the help of a trend line, connect the lower highs and lower lows. The lines will show convergence and slope in the downward direction. One has to identify the divergence between the price and an oscillator. Additional technical tools will come in handy in confirming the oversold signal. Finally, identify the break above the resistance point, this is an indicator for entry into the market.
Not all wedges will result in a breakout. Waiting for the breakout to start is one way of verifying the move. Essentially, you're hoping for a drastic shift beyond the support trend line for a rising wedge or the resistance trend line for a falling wedge.
For ascending wedges, for example, traders will be most concerned with a move above a previous support level. On the flip side, keep in mind that the general rule that during a breakout support can turn into resistance and can be applied. Therefore, you can wait for a breakout to begin, then wait for it to return and bounce off the ascending wedge's previous support area. This will allow you to confirm the move before opening your position.
Falling volume as the market consolidates is another common indicator of a wedge nearing a breakout. A surge in volume following a breakout is a good indicator that a larger move is on the way.
