Dalal Street Investment Journal - July 09, 2019

DSIJ.in JULY 8 - 21, 2019 I DALAL STREET INVESTMENT JOURNAL (^25)
Identification Guidelines:
Shape:

• The price must be in a clear downtrend.


• Draw two trendlines. Both are downward sloping and

eventually intersect. The upper trendline connects minimum

two highs and ideally three highs and each high should be

lower than the previous one. The lower trendline connects

minimum two lows and each low should be lower than the

previous one.

Volume: Most of the time, the volume trend is downward

throughout the formation. The volume becomes especially low

just before the breakout. The volume expansion must happen

after the breakout.

Time frame: It takes over three weeks for the formation to take

on the wedge appearance. Falling wedges rarely last more than

three months.

Breakout: The bullish confirmation of the pattern does not come

until the upper trendline resistance is broken in a convincing

fashion along with expansion of volume.

Pattern Psychology: The loss of momentum on each lower

lows gives the pattern its bullish bias. The breakout of upper

trendline indicates that the forces of demand have finally won

out and higher prices are likely to follow.

Price Target: Calculate the distance between the last downward

leg and then apply this length upward, starting from the initial

breakout point. This will be the first target. To calculate the final

target, we have to measure the distance of the largest leg and

then apply this length upward, starting from the initial breakout

point.

Conclusion :-

Reading the underlying trend in the markets correctly is the

most important aspect for any trader. How to read the trend

accurately is an art that very few can master. With practice and

observation of the markets, such skills can be developed over

time. The trend reversal patterns discussed in this story are no

doubt useful, but what is important is identifying them at the

opportune time and knowing exactly the breakout price.

• When the price is trading lower, the rate of the decline will

begin to slow down. This is followed by a range pattern which

ultimately shifts into a slow gradual increase. This series of

price movements graphically forms the shape of a ‘U’.

• The pattern's neckline is formed by the high point

preceding the U’s formation.

Volume: The volume is similar to the shape of the rounding

bottom—high at the beginning of the decline, low at the end of

the decline and rising during the gradual increase. The volume

is not too important on the decline, but there should be an

increase in volume on the upside.

Time frame: This pattern can develop over several weeks,

months or even years and it is considered a rare occurrence.

Breakout: The neckline being broken by the price along with

strong volumes will indicate that the original downtrend is

reversed.

Pattern Psychology: The rounding bottom forms a gradual

bowl shape, which indicates a gradual shift in the sentiments of

the investors from bearishness to bullishness. The volume tends

to mirror the price pattern—decreasing as bearishness wanes

and investors become indecisive. As sentiment becomes more

decisively bullish, volume tends to increase. The neckline

breakout along with strong volume indicates a major shift in

investors' sentiments.

Price Target: Measure the distance from the neckline to the

lowest point of the pattern and then apply this length upward,

starting from the initial breakout point through the neckline.

This will be the minimum expected target for rounding bottom

pattern.

3. Falling wedge:

The falling wedge pattern appears in a downtrend and it is

considered as a bullish reversal pattern. It occurs when the

price is making lower highs and lower lows, which form two

contracting trendlines. The falling wedge usually paves the way

for a reversal on the upside.