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Watching The SPX Wedge

  • Written by Syndicated Publisher No Comments Comments
    January 12, 2014

    Over the years I have observed that one of the most reliable chart patterns is the rising wedge — reliable in that it usually resolves downward.

    (This is an excerpt from recent blogs for Decision Point subscribers.)

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    The rising wedge is identified by drawing a rising bottoms line, then drawing a corresponding rising tops line above it. The rising tops line marks the top of the formation and is not as steep as the rising bottoms line. The reason that rising wedges usually resolve downward is that the steepest line (the bottom) is harder for bulls to maintain and usually fails first.

    On the chart below there is a rising wedge drawn from the October low, which is also accompanied by a negative divergence across recent PMO tops. This is a pretty good setup for prices to break down, so we have fairly high confidence that breakdown will occur. However, once the break has taken place, the pattern will have fulfilled the technical expectation, meaning we usually cannot project the amplitude of any decline that may result — the breakdown could be the start of a major decline, or merely a small correction that sets a less accelerated rising trend line. In this particular case there is a good line of support drawn from the May top that would come into play at around 1780.

    Screen shot 2014-01-10 at 1.37.02 PM

    Just to prove that rising wedges don’t always resolve the way we think they are supposed to, we can see another, larger rising wedge drawn from the May top and June low. It is also accompanied by a massive PMO negative divergence, expressing weakening internals. This lovely setup broke exactly opposite of what we expected, and the top of that wedge has provided excellent support for prices after the breakout.

    Conclusion: We expect the current rising wedge to resolve downward because that’s what they do more often than not. While the breakdown could be the start of a significant decline, the immediate downside target would be the support line at about 1780. At that point the downside expectation for the wedge will have been fulfulled, and we’ll have to see what develops from that point forward.

    Images: Flickr (licence attribution)

    About The Author – Carl Swenlin, Decision Point

    Carl SwenlinCarl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.