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The rising wedge is a bearish pattern that begins wide at the bottom and contracts as the price moves higher and the trading range narrows. The rising wedge can be classified as a continuation pattern or a reversal pattern. For a continuation pattern, the rising wedge will slope up, but the slope will go against the current down-trend. On the other hand, a rising wedge reversal pattern will slope up and trade with the prevailing up-trend. But regardless of either type, the pattern is considered to be bearish for the security in question.
The rising wedge pattern usually spans 3 to 6 months and can provide traders with a signal that the current trend is about to reverse. For the rising wedge to form, it takes at least two reaction highs, with each high being higher than the previous one to form the upper resistance line. Also, at least two reaction lows should be in place, with each low being higher than the previous one to form the lower support line. The upper resistance line should then converge with the lower support line, signalling that there is not enough demand at the higher prices to keep pace with the slope of the lower support line. This loss of upside momentum on each successive high thus gives the rising wedge pattern its bearish bias. As always, the pattern is not confirmed until a support level is broken, which, in this case, is the up-sloping lower support line.
In the above continuation rising wedge example, the price was in a down-trend when it began to slowly advance in mid-July. Newer highs were made at points A and B, with corresponding higher lows. But as shown on the RSI, the strength of the rally was suspicious as a negative divergence occurred for points A and B. Once the lower slope line caught up with the price, there was not enough upside momentum to push the price up any further and subsequently, the price broke below the support level around point C. The down-trend thus, continued.
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