Chart Lesson 10: Broadening Wedges, Descending

Broadening Wedges, Descending

Ranks:

Upward Breakouts:  Bull Market – 12/23, Bear Market – 14/19

Downward Breakouts:  Bull Market – 11/21, Bear Market – 6/21

Identification:

Shape:  Looks like a megaphone tilted down.  Both TLs slope downward with the LTL having a steeper slope.  They broaden out over time and neither is horizontal.

Breakout:  Look for patterns to break out in the direction of the current trend.

Partial Decline:  Price must touch the TTL, move down, turn around, and head higher without coming close to the LTL.  Look for an upward breakout.

Confirmation:  Wait for prices to close beyond the TLs before placing a trade.

Trade the TLs:  If the formation is especially broad, buy the LTL and sell at the top.  If it is a partial rise, close the position and look for a downward breakout.  Alternatively, sell short at the TTL once prices are heading down, and close the position if it rebounds off the LTL.

For Best Performance

• Trade with the trend: Select patterns with upward breakouts in a bull market, downward breakout in a bear market.

• Patterns in a bull market with an upward breakout have the lowest failure rates for extended moves.

• Bull markets throw back/pull back less often than do bear markets.

• Breakout day gaps help performance.

• A partial decline in a bull market correctly predicts an upward breakout

87% of the time and performance improves, too.

• In a bear market, look for a trend change 5 or 6 weeks after the breakout,

7 weeks in a bull market.

• Select patterns that are both tall and narrow. Avoid those that are short and wide.

• Patterns with a falling volume trend perform best when the breakout is upward. A rising volume trend does well for downward breakouts.