Driving a “wedge” between bulls and bears

While I was analyzing the charts of the S&P 500 and the Dow yesterday, I noticed a common price pattern know as a Wedge. It is simply a technical chart pattern composed of two converging lines connecting a series of peaks and troughs. Wedges can take the form of a rising wedge or a falling wedge.

Falling wedges form during a temporary pause of upward price rallies. Rising wedges will typically occur during a falling price trend and usually hint to a break lower. Even though a falling wedge is seen as bullish and a rising wedge as bearish, technical analysts such as myself look for a ‘breakout’ of this wedge pattern as bullish on a breakout above the upper line or bearish on a breakout below the lower line.

Please look at the chart I have below:

You can see that I have highlighted the rising wedge that seems to be forming on the S&P 500. If you looked at the Dow you would see the same pattern. Since we are currently in an overall down trend, the rising wedge should be looked at as bearish and a breakdown of the rising support is expected. However, this is not a sure thing. The markets could just as easily break higher and resume the short term up trend.

The Tale of the Tape: The markets are forming a common technical pattern know as a rising wedge. This would appear to signal an impending breakdown. However, this pattern should not be acted on without confirmation. The confirmation would be the break of the up trending support. Assuming this happens, entering short positions would be favorable. On the flip side, if you are bullish on the market, one might enter long positions on a pullback to the up trending support or on a break above the up trending resistance.

Waiting for the most opportune times that I have outlined above could provide you with higher probability entry points. No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.

Good luck!

Christian Tharp, CMT