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Written by and copyright © 2005-2008 by Thomas N. Bulkowski. All rights reserved.
Descending broadening wedges are mid list performers, found most often with upward breakouts in a
bull market. Downward breakouts are quite rare. As with other broadening patterns, partial rises and declines predict
the breakout direction. Partial declines work particularly well but are difficult to distinguish from the pauses that
normally occur as price bounces from trendline to trendline. For more information see pages 98 to 114 of the book
Encyclopedia of Chart Patterns, Second Edition and the
following...
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Important Bull Market Results
Overall performance rank for up/down breakouts (1 is best): 12 out of
23; 11 out of 21
Break even failure rate for up/down breakouts: 6%; 9%
Average rise/decline: 33%; 20%
Throwback/pullback rate: 53%; 53%
Percentage meeting price target for up/down breakouts: 79%; 36%
Identification Guidelines
|
Characteristic |
Discussion |
|
Price trend |
Can be up or down leading
to the pattern |
|
Shape |
A megaphone tilted down. |
|
Trendlines |
Both trendlines slope downward. |
|
Touches |
At least two peaks and two
valleys should touch their respective trendline. |
|
Volume trend |
Trends upward. |
|
Breakout |
Can occur in any direction
but 55% of the time it breaks out opposite the prevailing trend. |
Trading Tips
|
Trading Tactic |
Explanation |
|
Measure rule |
For upward breakouts, use the highest peak
(A) in the chart pattern as the target. For downward
breakouts, compute the difference between the highest peak
(A) and the lowest valley
B in the chart pattern to get the height. Multiply the
height by the above "percentage meeting price target" and then subtract
it from the lowest valley (B) to get a price target.
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Intraformation trade |
Short at the top (1) when
price heads down. Cover at the bottom trendline (2).
Do not buy at the bottom because of the down-sloping trend tends to cut profits
short. |
|
Buy at 3rd touch |
When price touches the bottom trendline for the third time
(see point 3) and begins rising, buy. Price may
breakout on the following trip across the chart pattern.
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Short at the top |
When price touches the top
trendline (1) and begins falling, sell or sell short.
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Partial rise |
A partial rise works just
14% of the time, so don’t rely on it. |
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Partial decline |
A partial decline works 87%
of the time |
|
Price trend |
For upward breakouts, the best performing patterns
are those with an intermediate-term (three to six months) rise leading to the pattern. |
|
Yearly low |
For downward breakouts, the best
performing are those with breakouts within a third of the yearly low. For upward breakouts, performance is constant. |
|
Volume trend |
Downward breakouts do best when
volume was trending up. Upward breakouts show better postbreakout performance when volume trends downward throughout the
pattern. |
|
Breakout |
The breakout direction is upward
79% of the time. |
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Throwbacks and pullbacks |
Throwbacks hurt postbreakout performance but pullbacks help.
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 The Measure Rule
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Example
The above figure shows an example of a descending broadening wedge chart pattern. The formation begins at point
A. This long and loose descending broadening wedge is typical for this chart pattern type.
A partial decline forms at B, and that might be the only redeeming feature of this chart
pattern. However, price breaks out upward and reaches the target within a week of the breakout. The target appears as
the dashed green line on the chart.
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