Descending Broadening Wedge

The broadening descending wedge pattern, as shown in Fig. 1 above, is formed by 2 downward-sloping diverging lines that connect a series of lower highs and lower lows, with increasing price volatility towards the right side. The top downtrend line is the resistance line and the bottom downtrend line is the support line.

A broadening descending wedge formation is made up of 3 sections:

The resistance and support lines begin to diverge.

Price begins to move sideways within the wedge.

The wedge breaks downward or upward.

The formation is valid when there are at least 5 touches to the trendlines. The extending pattern is created when there is a shift in the balance of power from the bears to the bulls. This shift typically occurs after a period of consolidation or range-bound trading.

The breakout from the wedge formation is often accompanied by an increase in volume, which can confirm the strength of the move. This pattern can take a long time to form, so patience is required. The falling broadening wedge can be bullish or bearish, depending on the direction of the breakout. However, you will need to stay flexible until the formation fully develops. The formation is only considered valid if the volume levels are decreasing as the price moves higher. This is a warning sign that the buyers are losing interest and that the trend is going to reverse. Volume levels will then rise significantly upon a breakout (either upward or downward).

If you see a widening formation on a chart, it is recommended you wait for a confirmed price action before making your trading decisions. This will help you get in the market at the right time and avoid getting caught in bull and bear traps.

Swing traders can buy the bottoms at the support line and sell the tops at the resistance line.

The pattern takes time to play out so you must have patience. It is also prone to false breaks. So buy/ sell only when a breakout/ breakdown is confirmed. Buy when a breakout is confirmed when the closing price is above the resistance line and volume rises significantly. Go short when a breakdown is confirmed with the closing price below the support line and volume rises significantly. Set your stop loss at 10% of your buying/ selling prices.

Very often the patterns have partial rises and partial declines that are followed by a breakout or breakdown. When price rises from the support line and fails to touch the resistance line it is likely to break down. When price falls from the resistance line and fails to touch the support line then it is likely to break out.