Technical analysis II

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16. Wedge formations

If you draw trend lines along both the bottom and top of a share price chart, you will sometimes get a trend channel and you'll sometimes get a wedge shape similar to the one below.

A rising wedge

• According to the theory, if the wedge is pointing upwards, as in our example, the share price will fall when the price line cuts across the lower line of the wedge.
• If the wedge is pointing downwards (a falling wedge), the share price will rise when the price line cuts across the upper line of the wedge.
• If the wedge is level - in other words not pointing up or down - then this is a 'consolidation' pattern and you can expect the trends to continue. (i.e. no reversal)

Notice that wedge formations take place over a period of 3-4 weeks. This is because they occur as reversals of intermediate and minor trends. They will not be seen, except in unusual circumstances, as reversals to a major market trend.

1. Average share prices 2. Moving averages 3. Weighted moving averages 4. Where to plot moving averages 5. Interpreting moving averages - the basics 6. Classic interpretation of moving averages 7. Combining short and long term moving averages 8. Moving average convergence/divergence (MACD) 9. Reversal patterns 10. Head and shoulders top 11. Head and shoulders bottom 12. Double top 13. Double bottom 14. Rounding tops and bottoms 15. Broadening formations 16. Wedge formations 17. The momentum indicator 18. The momentum oscillator 19. Rate of change indicator 20. Price minus average 21. Relative strength indicator 22. Conclusion

• Martin Pring's Introduction to Technical Analysis
• Technical Analysis Plain and Simple
• Technical Analysis of the Financial Markets
• An Introduction to Technical Analysis - Reuters Financial Training Series