|Rising wedges are a bearish pattern and always depict an obvious upward slope. Figure 1, the daily chart of the insurance index, shows this bearish pattern clearly and a possible breakdown beginning as the last trading session gaps down below the lower trendline.|
These wedges typically are reversal patterns although they can also be continuation patterns.
|A downside target range is chosen based on previous support and a significant moving average line. The area just below 3200 held support on two previous occasions and this area is likely to test support again. What makes this area even more significant is the proximity to the ever-important 200-day moving average (in this case, the exponential moving average [EMA]). Wedges, as opposed to symmetrical triangles, do not have a pattern fulfillment measure, so the 200-day EMA is a likely support target.|
|Figure 1: Daily chart of the Insurance Index shows a bearish pattern. A possible breakdown is beginning as the last trading session gaps down below the lower trendline.|
|Graphic provided by: StockCharts.com.|
|Several indicators are worthy of mention. At the top of the chart, the average directional movement index (ADX) shows a weak trend since the ADX fell below 20, so these challenges of the previous high in 2004 were fraught with doubt. The moving average convergence/divergence (MACD) and the relative strength index (RSI) both show a negative divergence to the overall direction of this index. This is often an excellent clue that a correction of some sort is pending. Meanwhile, the stochastic oscillator has aleady embarked on a downleg from the 80 region.|
|A surprise move above 3400 or the top trendline negates the wedge's bearish implication. In the meantime, expect a minor test just below 3300, failure of which will lead to a stonger support test of the 3200 target zone.|
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