A wedge pattern is similar to a triangle in that it has a resistance line and a support line that moves toward convergence on the right side of the pattern. In contrast to the triangle pattern, the wedge has both the resistance and support line either sloping upward for the rising wedge or both sloping downward for the declining wedge.
Rising Wedge Chart Pattern
The rising wedge can occur during two distinct periods: after a sharp rise and then fall or as a countertrend consolidation period after a long downtrend. The sharp rise and then fall creates a peak called a climax and then after a retreat from the climax, the rising wedge is yet another attempt at pushing prices back to the price level of the climax. It is expected that prices will break the upward sloping support line of the rising wedge and prices will fall.
Rising Wedge Breakout Direction
After a long downtrend, a rising wedge can be found as a countertrend consolidation period. Again, the pattern predicts that prices will break below the upward sloping support line of the rising wedge and will continue the price move downward.
Declining Wedge Chart Pattern
In contrast, the declining wedge can occur in two separate instances: the first occurs after a sharp fall and then move upward; the second acts as a countertrend consolidation period after a long uptrend. The sharp fall and then rise creates a peak called a climax and then after a move upward from the climax, the declining wedge is yet another attempt at pushing prices back to the price level of the climax low. It is expected that prices will break the downward sloping resistance line of the rising wedge and prices will head higher.
Declining Wedge Breakout Direction
After a long uptrend, a declining wedge can be found as a countertrend consolidation period. Again, the pattern predicts that prices will break above the downward sloping resistance line of the declining wedge and will continue the price move higher.
Sell Signal - Downward Breakout of Rising Wedge
When prices breakout and close above the resistance line, a buy signal is given; moreover, when prices breakout and close below the support line, a sell signal is given.
Buy Signal - Upward Breakout of Declining Wedge
Kirkpatrick & Dahlquist (2010) suggest traders look for a downward breakout of the rising wedge and an upward breakout of the declining wedge (p. 325).
The price target for the rising and falling wedge is given below using Bulkowski's (2008) price target formulas:
Rising Wedge in Downtrend Example
The chart above of the Crude Oil ETN (OIL) shows a sharp downtrend followed by a rising wedge consolidation period. The up sloping resistance line is formed by four peaks and the up sloping support line is formed by five valleys which over-conforms to the necessary five total touches creating the support and resistance lines. The wedge also is formed past the three week mark, distinguishing it from the pennant pattern. The breakout occurred approximately three-fourths of the way into the wedge pattern which is slightly above normal. As is typical, prices broke out of the rising wedge pattern to the downside as a continuation of the prior downward trend. According to Bulkowski (2005),rising wedges breakout below 69% of the time.
Declining Wedge in Uptrend Example
The chart above of the Financial SPDR ETF (XLF) illustrates a declining wedge in an uptrend. As is typical with this pattern (the breakout occurs upward 68% of the time), prices break to the upside (Bulkowski, 2005).
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