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5 Fibonacci Tricks
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Wedges and Volume
20 Golden Rules
20 Rules For Trade Execution
20 Rules To Stop Losing Money
5 Wave Decline
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WEDGES

The wedge formation is also similar to a symmetrical triangle in appearance, in that they have converging trendlines that come together at an apex.  However, wedges are distinguished by a noticeable slant, either to the upside or to the downside.   (As with triangles, volume should diminish during its formation and increase on its resolve.)

A falling wedge is generally considered bullish and is usually found in uptrends.  But they can also be found in downtrends as well.  The implication however is still generally bullish.  This pattern is marked by a series of lower tops and lower bottoms.

A rising wedge is generally considered bearish and is usually found in downtrends.  They can be found in uptrends too, but would still generally be regarded as bearish.  Rising wedges put in a series of higher tops and higher bottoms.

 

FALLING WEDGE IN AN UPTREND (BULLISH)

HLTH / WebMD Corp.

Falling wedge in an uptrend (bullish). From PRS, Vol. 2, No. 47, for the week of 12/30/02.


RISING WEDGE IN A NEW DOWNTREND (BEARISH),
(AFTER A BULLISH ASCENDING TRIANGLE IN AN UPTREND)

IMCL / ImClone Systems, Incorporated

After a bullish ascending triangle in an uptrend IMCL reached and surpassed it's measured move target of $69.76 (base of $6.88 added to the breakout point of $62.88 for a measured move target of $69.76), and actually surpassed it, the market then came crashing down, below the earlier surpassed price target (which had became your new support or stop-out point [see purple hashed line]), it then based in the same area as it's previous bullish consolidation. It quickly traced out a bearish rising wedge before just absolutely collapsing. The ensuing free-fall took place on huge volume. (Notice how the volume actually started picking up as it pulled back from it's highs. That alone was a signal that the bull run was waning.) The push below the 'old' price target on it's way down (your 'stop-out' point), was your signal to get out. The rising wedge formation was a clear foreshadowing of lower prices to come and to get short (or at least your last chance to get out). I'm sure many people rode this once 'winning' stock too long and ultimately turned a great and profitable bullish trade into a terrible loser. But if you followed chart pattern analysis, you probably would have done great, ... on both sides!

 

Volume

After looking at the various chart patterns explained so far, you'll notice that consideration has been given to volume.  Simply put, volume is the number of contracts traded over a period of time.  And since even the most reliable of patterns will fail sometimes, volume can be used as another tool in determining what's happening within the market and more specifically what's happening within the pattern.

It is believed that volume should increase in the direction of the price.  If the prevailing trend is up, volume should be heavier on the up days and lighter on the the down days. If the trend was down, volume should be heavier on the down days, with lighter volume on the up days. This makes sense because in an uptrend there should be more buyers than sellers, and in a downtrend there should be more sellers than buyers. If volume should start to diminish, it could be a warning that the trend could be losing steam and that a consolidation or perhaps a reversal could be ahead.  If the trend was up, and now we're seeing more volume on dips than on rallies, it should be an alert that buying pressure is waning and sellers are becoming more aggressive.  The reverse would be true in a downtrend. If volume starts to shrink on the sell-offs and picks up on the rallies, once again, it could be a sign that the trend is in trouble, and buyers are starting to assert themselves. When volume moves in the opposite direction of the price, this is called divergence.

One of the reasons why volume has a tendency to diminish during periods of indecision is for just that reason. During periods of sideways movement, often traders will avoid a market, preferring to commit their funds once a clear-cut breakout is seen.  However, while it's typical for volume to diminish during these times, volume can give clues as to possible future direction by measuring the level of conviction of the buyers and the sellers.  Seeing if there's heavier volume on the up days or on the down days could be useful in getting positioned during a sideways move or a formation of a pattern.  The idea being that if there's more volume on the up days than the down days, the buyers are probably the more aggressive and the market should more than likely breakout to the upside.  The reverse being true if the volume is heavier on the down days, with the market likely to breakout to the downside.

So while it seems as if chart patterns, volume and technical analysis in general all have some forecasting abilities, none are foolproof.  Used together, they can be quite helpful in your trading and investing, but should be looked at more as helpful hints as to a markets bias, more than anything else.