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Thomas N. Bulkowski’s successful investment activities allowed him to retire at age 36. He is an internationally known author and trader with almost 30 years of stock market experience and widely regarded as a leading expert on chart patterns. His four books, including the best selling Encyclopedia of Chart Patterns, have been translated into six languages. He may be reached at

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Bulkowski’s Descending Broadening Wedges

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As of 09/02/2010
10,320.10 50.63 0.5%
4,342.03 58.62 1.4%
396.87 -0.49 -0.1%
2,200.01 23.17 1.1%
1,090.10 9.81 0.9%
 
YTD
-1.0%
5.9%
-0.3%
-3.0%
-2.2%
 
10,475 by 09/15/2010
4,450 by 09/15/2010
400 by 09/15/2010
2,250 by 09/15/2010
1,100 by 09/15/2010
Mkt Overview: 08/29/2010

CPI: on 08/27/2010

Written by and copyright © 2005-2010 by Thomas N. Bulkowski. All rights reserved.

For more information on this pattern, read Encyclopedia of Chart Patterns, Second Edition, pictured on the right, pages 98 to 114. That chapter gives a complete review of the chart pattern, compared to what is described below.

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.

 

 

Descending broadening wedge chart pattern appears
Descending Broadening Wedge

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

CharacteristicDiscussion
Price trendCan be up or down leading to the pattern.
ShapeA megaphone tilted down.
TrendlinesBoth trendlines slope downward.
TouchesAt least two peaks and two valleys should touch their respective trendline.
Volume trendTrends upward.
BreakoutCan occur in any direction but 55% of the time it breaks out opposite the prevailing trend.
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Trading Tips

Consult the associated figure on the right.

Trading TacticExplanation
Measure ruleFor 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.
Intraformation tradeShort 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 touchWhen 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.
Short at the topWhen price touches the top trendline (1) and begins falling, sell or sell short.
Partial riseA partial rise works just 14% of the time, so don’t rely on it.
Partial declineA partial decline works 87% of the time
Price trendFor upward breakouts, the best performing patterns are those with an intermediate-term (three to six months) rise leading to the pattern.
Yearly lowFor downward breakouts, the best performing are those with breakouts within a third of the yearly low. For upward breakouts, performance is constant.
Volume trendDownward breakouts do best when volume is trending up. Upward breakouts show better post breakout performance when volume trends downward throughout the pattern.
BreakoutThe breakout direction is upward 79% of the time.
Throwbacks and pullbacksThrowbacks hurt post breakout performance but pullbacks help.
Adam & Adam double top measure rule
The Measure Rule
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Example

Descending broadening wedge chart pattern 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.

Other Examples

See Also

-- Thomas Bulkowski

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Copyright © 2005-2010 by Thomas N. Bulkowski. All rights reserved. If a train station is where a train stops, what is a workstation?