Hello. I really enjoy your newsletter. It has been very helpful. It appears from your writings that “ascending wedges” are good chart patterns to go long on once they breakout. I attended a class [and was taught] that in any wedge, draw the two lines that form the wedge and watch that the “flat line usually wins”. In many ascending wedges, this is often the top line (the lows are rising faster than the highs), and the pattern eventually breaks down, not up. Do you agree with this, disagree? What are your thoughts on ascending wedges?
We are glad that the newsletters are of help to you. Ascending wedges can lead to some explosive breakouts, and this is especially true when the market is making bullish moves. They can form over a short period (couple of weeks) or over months. Clearly, it is a more bullish pattern in an overall stronger market or strong run by a stock – we often see them form after a stock has broken from another pattern, like a cup with handle, and the pattern holds above the breakout point on the test. It forms the ascending wedge on top of the former pattern, and leads to a big move. Of course, it does not have to form in that manner. Some recent ones from the Technical Traders report include KANA and MROI (exploded out of the pattern Friday). The move can be explosive, but as KANA showed, can be short-lived in a tough market. We have had dozens break out over the past year. A descending wedge works in the opposite direction. The stock makes lower highs while hold a steady low, and pressure builds for the downside break. One we were following recently on the reports was FLR, and it just cratered.
We can look at wedges and certainly get an idea of the strength of it by looking at the various factors that affect the overall pattern. For example, in the best ascending wedges you will see volume build on the moves up but ease off as the stock falls back. We look for a volume surge as the stock moves over the highs of the pattern. Again, the results can be explosive, but if we are not in a strong up-trending market the breakout can be short-lived, but the few sessions of moves can be quite lucrative.
The discussion of which line is longer as ruling the move applies more to pennants than wedges or triangles. In a pennant, where we have a descending trendline from the top and an ascending line from below, the longer line will usually win the battle. This can be applied to ascending wedges where say the upper line defines a historic level that goes way back (i.e., strong resistance), and the ascending line has formed over a much shorter period, that can indicate that it could be harder to breakout. Overall, we have had a lot of success with the pattern and like to play it.
