Continuation Wedge (Bullish)

Implication

A Continuation Wedge (Bullish) is considered a bullish signal. It indicates a possible continuation of the current uptrend.

Description

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

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

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 above Resistance Level

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

Criteria that Refute

• Rising or Stable Volume

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

• Price moves below Support Level

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

• Underlying Behavior

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