Below is a slider quiz to test your ability to identify descending broadening wedges and trade them. Captions appear below the pictures in red for guidance, so be sure to scroll down far enough to read them.
1 / 7
Here's a descending broadening wedges, outlined in red. Price crosses the pattern from side to side well until D. Then we get a white space hole (D to A).
Point A doesn't count as a trendline touch because it doesn't rest at a minor high (or low). The red trendline just cuts through price. Point A marks an upward breakout.
Look for at least 3 touches of one trendline and 2 of the other. At B, a partial rise suggests an immediate downward breakout which fails to happen in this
example. Partial rises work just 33% of the time, so it's best to ignore the signal. Volume is U-shaped in this example, but usually trends upward from start to end.
The two red lines highlight the wedge at A. This one has a partial decline (A) which correctly signals an upward breakout (works 79% of
the time). The flag is at D, and BC are the two bottoms of a double bottom.
Point A is the diamond bottom, FGB are the three peaks of a head-and-shoulders top, BC is a double top, D is the wedge. This wedge isn't a good example of one
(too much white space at D) so if you didn't find it, that's okay. A partial rise (E) suggests a downward breakout. That happens at F. How far will price fall, if indeed, it drops?
Look at the next chart for guidance.
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The chart is on the weekly scale so you can see support and resistance levels. Which price, from 55 down to 10, marks the ultimate high or ultimate low?
An ultimate high/low is the highest peak or lowest valley after which price drops/rises at least 20%, signaling a trend change. Make your price selection now. The correct answer will be
one of the green lines.
7 / 7
This chart shows what happened. The ultimate low is at A, so if you guessed 27, you were correct. Price recovers at least 20% from A. However, the stock continues
declining, eventually bottoming out at $6 in January 2016.
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