A rising wedge is a bearish pattern when it appears at the top of a mature uptrend. It signifies that a potential top might be in the offing. The duration (short/medium/long term) of the top depends upon the timeframe on which it appears.
Preconditions ------------------ > A strong mature (multi-day/week)trend in the background > Wave HH1 to be extremely smaller than H > HH2 should be smaller than HH1 > HH-HL structure results into a rising wedge or arrowhead > It should appear at the potential top of a rally > Wave LL has to be snappier/abrupt/faster than wave HL & L
Volume characteristics ---------------------------- > The volume in HH1 is generally less than volume in wave H > Volume in HH2 is less than volume in HH1 > Volume in wave LL should be higher than volume in wave HL and L
Confirmation ----------------- > Wave LL breaks the low of wave HL
Psychology -------------- > Weak character of waves HH1 & HH2 with shortening of length and lesser volume means buyers are not interested at these levels > Breakout buyers trapped above H and HH1 > Sharp wave LL with increasing volume suggest that sellers are taking over and a potential medium to long term top may be in place
Trading --------- > Book profits full/partial, in any long position, at the break of HL > Risk takers short at the break of HL but risk in may be large as stop loss (above HH2) could be wide > Other may wait for a pullback on the upside (after break of HL); price often reverts back to average prices where short position can be taken > Always try to minimize risk, either by reducing position size or otherwise
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The pattern is significant when it appears in a fresh high ground (new all time highs etc) and there is nothing on the left to resist but Its also significant when it appears in the previous area of resistance as in the following example.
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