21# Rising Wedge Reversal

• Rising wedges can be either reversal or continuation patterns. When they occur in an uptrend they are always reversal patterns.

• Because rising wedges are generally just the starting points for larger reversal patterns, the implied

technical targets are modest.

• Volume is key in rising wedge patterns in uptrends. Volume should increase on the initial surge to new highs but dwindle through the remainder of the pattern. As the breakout occurs volume should surge.

• Downside breakouts often lead to small 2-3% declines followed by an immediate test of the breakout level. If the stock closes above this level (now resistance) for any reason the pattern becomes invalid.

Like all reversal patterns, the Rising Wedge in an uptrend is ultimately about deception. At first and perhaps even second glance, the stock may appear to be doing all of the right things, making a series of higher highs and higher lows. The flow of news is unanimously positive and Wall Street analysts fall over one another to raise estimates and price targets, yet in reality, the stock is being distributed from strong hands (longer-term investors) to weak hands (short-term speculators and less astute investors).

The pattern begins when a much loved stock moves to a new high after an extended advance on good volume. To be sure, momentum investing and all around euphoria contribute to the surge in stock price but by most accounts the fundamental outlook is solid. As the stock makes a new high something peculiar occurs. Instead of volume surging, it actually begins to contract and price falters, making a reaction low. Wall Street analysts conclude that the stock is merely having a well deserved short term consolidation after a lengthy advance and in the days ahead they reiterate "buy" ratings. Once again the stock surges to a new high but volume slows even further and very quickly price begins to fade.

At this time the news flow is excellent. The company may be raising guidance, unveiling new products, winning contracts and/or setting stock splits. In short, it is easy to be bullish -- especially when most investors share that sentiment. But beneath the surface something is happening, the stock is being distributed, longer-term investors are using every piece of good news to reduce positions.

As the stock falters for a second time the low achieved is well above the reaction low and the chart begins to take on the appearance of a wedge. After several sessions of consolidation more good news hits the news wires and the stock surges to yet another new high. As was the case during the previous two rallies, volume contracts. Then, abruptly price begins to falter. Wall Street analysts remain steadfast because there have been no fundamental developments to account for the weakness. Several firms reiterate "buy" ratings, advising clients to use the weakness to build positions but in reality, longerterm investors are continuing to sell. This time the new bullish talk has little impact and price begins to free fall.

The bullish talk and positive news flow continue but it is just a matter of time before the parameters of the wedge pattern are violated. Soon after, support at the reaction low is violated. Several days after the first negative news item hits the wires and speculators and recent investors begin to panic, price plummets. Several weeks later the stock trades back to intermediate term resistance.