The Wedge Formation

The wedge formation is similar to a symmetrical triangle both in terms of its shape and the amount of time it takes to form. Like the symmetrical triangle, it is identified by two converging trend lines that come together at an apex. In terms of the amount of time it takes to form, the wedge usually lasts more than one month but not more than three months, putting it into the intermediate category.

What distinguishes the wedge is its noticeable slant. The wedge pattern has a noticeable slant either to the upside or the downside. As a rule, like the flag pattern, the wedge slants against the prevailing trend. Therefore, a falling wedge is considered bullish and a rising wedge is bearish. Notice in Figure 6.8a that the bullish wedge slants downward between two converging trend lines. In the downtrend in Figure 6.8b, the converging trend lines have an unmistakable upward slant.

Wedges as Tops and Bottom Reversal Patterns

Wedges show up most often within the existing trend and usually constitute continuation patterns. The wedge can appear at tops or bottoms and signal a trend reversal. But that type of situation is much less common. Near the end of an uptrend, the chartist may observe a clear cut rising wedge. Because a continuation wedge in an uptrend should slope downward against the prevailing trend, the rising wedge is a clue to the chartist that this is a bearish and not a bullish pattern. At bottoms, a falling wedge would be a tip- off of a possible end of a bear trend.

Whether the wedge appears in the middle or the end of a market move, the market analyst should always be guided by the general maxim that a rising wedge is bearish and a falling wedge is bullish.