(Leonardo Da Vinci)
Falling wedge is a bullish pattern that is possible to classify into the triangles family (the opposite is rising wedge). As for triangles, in fact, the falling wedge pattern holds the same technical features both in terms of volume (which tends to decrease while getting closer to the pinnacle, and then explode when the breakout occurs) and in terms of time (the longer the time for the wedge forms, the greater the strength and the duration of the pattern).
The pattern consists of two descending lines (bearish trend lines) which converge at a low point, shaping a wedge like figure. In its ideal and most performing configuration, the falling wedge appears at the end of a downtrend, thus indicating a trend reversal. Due to the bearish market, the pattern is more difficult to be recognized as it does not violate the basic rule to identify a downtrend, a sequence of lower highs and lower lows.
Then attention has to be pointed to the fact that the lower lows line has yet a negatively oriented slope, but less negatively shaped than lower highs line. The following example highlights the profile of a falling wedge.
Bottoms and tops are both descending, but the bearish pressure seems losing its momentum and the dips align each other with a less negative slope than the tips. This is a precious clue for the qualification of the strength of the existing trend. Once the formation has completed it is necessary to wait for the price breakout to occur. To be included in the “ideal breakout” category the breakout is expected to happen with high volumes, closing price right on the top with higher volatility. In any case it is the peculiar slope of the pattern that allows its identification.
Differences between triangles and wedges
Differences with triangles, both in falling and rising wedge, are self evident. In the "wedges" the two lines are inclined, while in triangles the two lines converge with opposite inclinations or, in the case of the rectangular triangle, one is horizontally shaped.
The difference with the pennant is in the long lasting time for the formation of the pattern.
Distinctive trait of the pattern
The falling wedge could be found even at the top of an uptrend, where it will act as ‘distribution’ phase, before the re-establishing of the uptrend. Experience teaches that, differently to its opposite (rising wedge), the falling wedge that comes out at the top of an uptrend gives the same degree of reliability as when it comes at the end of a downtrend. It is yet worth to remember that no pattern is free from false signals.
Breakout of the pattern
As it happens for all the graphic formation, even for the falling wedge after the breakout there is a retest of the broken level. From that point ahead there will be a minimum ideal target level that is equal to the length of the small cathetus of the triangle (where would be useful to close a part of the position and/or moving stop to breakeven) and a final target equal to the extent of the preexisting trend. Stop should be placed below the last dip that has preceded the upside breakout .