Broadening wedge patterns are similar to the broadening top and bottom formation with the exception that both the resistance and support lines both are trending upward (ascending broadening wedge) or both are trending downward (descending broadening wedge). As a broadening pattern, the price range (high minus low) of the pattern increases as the pattern progresses, creating a "megaphone" look.
Ascending Broadening Wedge
The ascending broadening wedge occurs when prices make higher highs and higher lows; each high and low should occur at least three times to create the proper support (line drawn below the lows, sloping upward and to the right) and resistance (line drawn above the highs, sloping upward and to the right, even steeper than the support line).
Ascending Broadening Wedge Breakout Direction and Average Max Gain and Decline
More often (73% of the time) prices breakout to the downside; however, the best predictor for the direction of the breakout is that 76% of breakouts occur in the direction from where prices entered (Bulkowski, 2005). When prices breakout above resistance (triggering a buy signal), prices have an averaged maximum gain of 38% before any correction of 20% or more; when prices breakout below support (triggering a sell signal), prices have an averaged maximum decline of 17% before a counter-breakout trend 20% correction (Bulkowski, 2005). Note that Bulkowski (2005) suggests aggressive traders only act on buy signals when trading inside the pattern, namely that traders should buy the third successful touch of support and sell at the touch of resistance; but do not short in the ascending broadening wedge.
The only broadening pattern that Kirkpatrick & Dahlquist suggest trading is the ascending broadening wedge that breaks to the upside because of its negligible failure rates (2010, p. 320).
Descending Broadening Wedge
The descending broadening wedge occurs when both the resistance and support are trending down and to the right and the price range is broadening with time.
Descending Broadening Wedge Breakout Direction and Average Max Gain and Decline
Prices in the descending broadening wedge pattern breakout upward about 79% of the; when prices breakout above, prices eventually rise to an averaged maximum gain of 33% before the first 20% reversal; and when prices breakout below support, prices decline by an averaged maximum of 20% (Bulkowski, 2005).
Bulkowski (2008) offers the following calculated price targets based off of his historical chart research of the ascending and descending broadening wedge patterns:
Ascending Broadening Wedge Chart Example
The chart above of Microsoft (MSFT) shows a typical ascending broadening wedge with a breakout to the downside (that occurs roughly three-quarters of the time). The wedge had the minimum three higher highs and had four higher lows. Once prices broke below the uptrend support, prices then rallied back to the breakout price. According to Bulkowski (2005), this pullback occurs quite frequently, 57% of the time. Another interesting trait of this chart is that the uptrending support line became an uptrending resistance line after the breakout from the pattern occurred.
Descending Broadening Wedge Chart Example
The chart above of Home Depot (HD) shows prices dropping in a descending broadening wedge. A noteworthy aspect of this chart is that there is a directional hint that the breakout would be upward when prices failed to drop back down to the downtrending support line. This "partial decline" predicts the direction of an upside breakout of a descending broadening wedge 87% of the time, according to Bulkowski's (2005) research.
- Kirkpatrick II, C.D., & Dahlquist, J.R. (2010). Technical Analysis: The Complete Resource for Financial Market Technicians (2nd ed.). Upper Saddle River, NJ: FT Press.
- Rockefeller, B. (2011). Technical Analysis For Dummies (2nd ed.). Hoboken: John Wiley & Sons.
- The Pattern Site. (2008). Bulkowski's Measure Rule. Retrieved June 1, 2012, from http://thepatternsite.com/measure.html
- The Pattern Site. (2005). Bulkowski's Ascending Broadening Wedge . Retrieved June 1, 2012, from http://www.thepatternsite.com/abw.html
- The Pattern Site. (2005). Bulkowski's Descending Broadening Wedges . Retrieved June 1, 2012, from http://www.thepatternsite.com/dbw.html