The Ascending Broadening Wedge is a common chart pattern that I love to trade. Contrary to the Rising Wedge, in which price action contracts as the pattern matures, the Ascending Broadening Wedge widens as the two trend lines that have formed diverge from one another.
The ascending broadening wedge is considered to be a reversal pattern, and is bearish in nature. Though the pattern is typically a signal of reversal, continuation of the uptrend is still possible.
When present as a continuation pattern, the wedge will still slope to the upside, but the up-slope will typically be found as a pullback within a downtrend. When present as a reversal, the pattern will slope to the upside within an uptrend. Regardless of continuation or reversal, ascending broadening wedges are always bearish in nature.
Trend Established: As with any reversal, there needs to be an established trend to reverse. The ascending broadening wedge can form on any time frame, and can mark the reversal of a short, intermediate, or long term trend. The odds of a breakdown are at 73%, leaving only 27% odds of a break to the upside. At times the overall trend may actually be consumed entirely by the pattern, while at other times the pattern forms after an extended advance.
Resistance Line: At least two highs are required to draw the upper resistance trend line. For the ascending broadening wedge to be a valid pattern, price action should be creating higher highs.
Support Line: At least two lows are required to draw the lower support trend line. Price action should be creating higher lows in order for the pattern to be valid.
Price Action Expansion: The distance between the resistance and support lines will expand or widen as the pattern matures.
Break in Support Line: Confirmation of the bearish move is when the support line is broken to the downside, and the candle for the current time frame has closed passed the break. If you want to play it safe, wait for a break of the previous higher low. Once this support is broken, there may be a reaction rally to retest the new found resistance level (broken support line) as show below on AVXL 30 min chart.
Executing the Trade
Safe Trade
Entry: Enter short position once wedge has broken to downside, and candle has closed below support.
Mental/Hard Stop: The stop is placed above the support line.
Price Target: Theoretical target of the pattern.
Advantages: It is breaking down.
Disadvantages: The target is only reached 58% of the time on average, so you may be forced to determine exit on your own using indicators such as the MACD, RSI, Parabolic SAR, and moving averages.
Aggressive Trade
Entry: Enter short position at a touch of resistance/supply line.
Mental/Hard Stop: The stop is placed above the previous high.
Price Target: Theoretical target of the pattern.
Advantages: Downward exit of 79% on average. Odds are definitely in your favor.
Disadvantages: The downward exit isn't confirmed, and again, target is only reached 58% of the time on average.
Another example of the ascending broadening wedge found on NFLX 60 min chart:
Stats
Probability of upside exit = 27%
Average rise in price on upside exit = 38%
Probability of downside exit = 73%
Average decline in price on downside exit = 17%
Probability of reaching price target = 58%
Touches - Price must touch each trend line twice in order for pattern to be valid.
If you have any questions, please feel free to comment. If you learned something new when reading this, share it with others.
Labels: Technical Analysis
