- The falling wedge chart pattern can fit in the continuation or reversal category. When it is a continuation pattern it will trend down, however the slope in the wedge will be against the overall market uptrend. When it is a reversal pattern, the falling wedge trends down when the overall market is in a downtrend.
- The falling wedge is a bullish pattern regardless of what kind of market it appears in.
- The Falling Wedge is a bullish chart pattern that begins with a wide trading range at the top and contracts to a smaller trading range as prices trend down.
- This price action forms a descending cone shape that trends lower as the vertical highs and vertical lows move together to converge.
- The bullish bias in this pattern can’t be signaled until a breakout of the descending resistance to show this is a reversal pattern from lows in price.
- This is a longer term pattern that generally forms over a three to six month timeframe.
- The new lows set in this pattern create lower lows, but the new lows should become less in magnitude. Less depth in lows indicate a decrease in the strength of selling pressure and should create a lower trend line of support with less declining slope than the upper line of resistance.
Notice that the $XLI chart had lower lows and lower highs for several weeks before the descending upper trend line was finally broken. The break above the resistance line is a signal that the downtrend has been broken and the potential for n uptrend has begun.
Chart Courtesy of StockCharts.com.
Chart Summary: The falling wedge is a longer term bullish chart pattern that has a declining line of resistance and a declining line of support. The support line should become more stable and flatter as the pattern forms showing selling pressure decreasing. As the lines converge the odds are that if the descending line of resistance is broken then this pattern is either a continuation of an uptrend if it is a bull market or a reversal from a near term price bottom if the pattern forms during a bear market.