Chart Pattern (Part 5) - Wedge and Rectangle Patterns
Technical analysis

Chart Pattern (Part 5) – Wedge and Rectangle Patterns

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Wedge Patterns  

Wedges are the most unpredictable patterns, as their prior trend and trend after the breakout is uncertain. They are short term patterns and are of two types;

1. Rising wedge pattern – It is mostly considered as a bearish pattern and can lead to either continuity of ongoing trend or reversal of a trend. The price moves in between two up sloping and converging lines. The first upper line is the resistance line which should have at least three highs in which successive highs should be higher than the previous ones. The second lower line is the support line which should have at least three lows in which successive lows should higher than the previous ones. As the pattern matures these two lines start converging as the lows of support line becomes shorter and the line becomes steeper than the resistance line. Ultimately, the lows of the support line converge with the highs of the resistance line. A breakout can occur in either direction but chances of the downward movement are always higher therefore it is mostly considered as a bearish pattern. Breaking of support line with heavy volume confirms the pattern. Pullbacks are highly possible in this pattern.  

Rising wedge

(Chart courtesy of StockCharts.com)

2. Falling wedge pattern – It is mostly considered as a bullish pattern and can lead to either continuity of ongoing trend or reversal of a trend. The price moves in between two down sloping and converging lines. The first upper line is the resistance line which should have at least three highs in which successive highs should be lower than the previous ones. The second lower line is the support line which should have at least three lows in which successive lows should be lower than the previous ones. As the pattern matures these two lines start converging as the highs of the resistance line become shorter and the line becomes steeper than the support line. Ultimately, the highs of the resistance line converge with lows of the support line. A breakout can occur in either of direction but chances of upward movement are always higher therefore it is mostly considered as a bullish pattern. Breaking of resistance line with heavy volume confirms the pattern. Pullbacks are highly possible in this pattern

Falling wedge

(Chart courtesy of StockCharts.com)

Rectangle Patterns 

Rectangles are mostly considered as continuation patterns and are also known as trading ranges or consolidation zones as price moves in between two horizontal lines only. The upper line is the resistance line and the lower line is the support line for the price. These patterns represent a conflict between buyers and sellers in which both are powerful and neither of them let the price move in one direction until the breakout occurs. Many technicians believe they can serve as both reversal and continuation patterns. One should always wait for the breakout with heavy volume for confirmation while trading them. The move created after this pattern is considered as a significant move. There are two types of rectangles:-

1. Bullish rectangle pattern – It mostly forms after an uptrend. Price takes a pause and consolidates between two horizontal lines. Three almost equal highs and lows are required to form the upper resistance line and lower support line respectively. Breakout with heavy volume completes the pattern. 

Bullish rectangle pattern

2. Bearish rectangle pattern – It mostly forms after a downtrend. Price takes a pause and consolidates between two horizontal lines. Three almost equal highs and lows are required to form the upper resistance line and lower support line respectively. Breakout with heavy volume completes the pattern.Bearish Rectangle Pattern

 

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