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WEDGE FORMATIONS


Charting Patterns - Rising Wedge

07/14/00 12:35:36 PM
by Sean Moore

Recognizing chart formations as they form can give you an inside edge in trading. Wedge formations are similar to triangle formations and can be used to help identify highs or lows.

Security:   MSFT
Position:   N/A

Like many chart formations, wedge formations attempt to identify areas of support and resistance. Unlike a support/resistance channel, the support and resistance lines of a wedge formation are not drawn parallel to each other. Instead the lines are drawn to converge, giving the formation a wedge appearance. This is similar to a triangle formation, and when analyzing the formation, you still look for breakouts from the support or resistance areas.

The wedge formation that is likely to occur at a market high is called the rising wedge. In a rising wedge, both the support and resistance lines have positive slopes, but the support line will be steeper than the resistance line. If the price breaks below this support line, it is likely that the price will fall to the wedge bottom. This formation is very similar to the ascending triangle, with the only difference being that the resistance line will be upward sloping instead of horizontal. Another common factor to look for with the rising wedge is declining volume.



Figure 1: Daily price chart for Micosoft Corp. Support and resistance lines form a rising wedge.
Graphic provided by: Window.
 
For an example of the rising wedge formation, look at the daily price chart for Microsoft Corp. [MSFT], shown in Figure 1. By drawing a support line through the local lows, and a resistance line through the local highs, you can clearly see the wedge forming. As expected, this pattern is accompanied by declining volume. If the price does break below this sharp support line, the next support area could likely be around the $60 /share range which would be a substantial drop, so approach this stock cautiously, at least from a technical standpoint.



Sean Moore

Traders.com Staff Writer.

Title: Project Engineer
Company: Technical Analysis, Inc.
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Seattle, WA 98116
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Website: Traders.com
E-mail address: smoore@traders.com

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