Dalal Street Investment Journal - July 09, 2019

DSIJ.in JULY 8 - 21, 2019 I DALAL STREET INVESTMENT JOURNAL (^23)

3. Rising Wedge
   The 'rising wedge' is a bearish reversal pattern that begins wide

at the bottom and contracts as the price moves higher. A series

of higher swing highs and higher swing lows that form the

pattern narrow down into a apex point as the bulls become less

interested in buying.

Identification Guidelines:

Shape:

• The price must be in a clear uptrend.


• Draw two trendlines. Both trendlines are upward sloping

and eventually intersect. The upper trendline connects

minimum two highs and ideally three highs, and each high

should be higher than the previous one. The lower trendline

which connects minimum two lows and each low should be

higher than the previous one.

Volume: The volume is a key element in correctly identifying a

rising wedge. Most of the time, the volume trend is downward

throughout the formation. The volume becomes especially low

just before the breakout.

Time frame: A rising wedge takes time to form. The price

makes new higher highs and higher lows as it bounces from the

trendline to trendline. It takes over three weeks for the

formation to take on the wedge appearance. Rising wedges

rarely last more than three months.

Breakout: The bearish confirmation of the pattern does not

come until the lower trendline is broken in a convincing

fashion along with expansion of volume.

Pattern Psychology: The upper and lower trendlines

converge as the pattern matures. The advances from the

reaction lows become shorter and shorter, which makes rallies

unconvincing. The loss of momentum on each successive high

gives the pattern its bearish bias. The breakout of lower

trendline indicates that the forces of supply have finally won out

and lower prices are likely.

be the first target. To calculate the final target, we have to

measure the distance from head to neckline and then apply this

length downward, starting from the initial breakout point

through the neckline.

2. Rounding Top

The 'rounding top' pattern may form at the end of an extended

uptrend and often indicates a reversal in the long term price

movement. This pattern appears as an inverted ‘U’ shape.

Identification Guidelines:

Shape:

• The price must be in a clear long term uptrend.


• As the price moves up, it bends over and rounds off at the

top, then continues its rounding turn until it is head down

and retraces the prior rise.

• The pattern's neckline is formed by the low point preceding

the inverted U’s formation.

Volume: The volumes are often lowest at the centre of the

formation and higher at the either end. This observation is just

a guideline and not an inviolable rule. What is important is the

price rounding over and forming a bowl-shaped pattern and

the volume trend just adds evidence to the veracity of the chart

pattern.

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 the original uptrend is reversed.

Pattern Psychology: A rounded top forms as investors'

sentiment shifts slowly from bullishness to bearishness. The

lowest volume in the centre of the formation indicates indeci-

siveness in the market. The neckline breakout, along with

strong volumes, indicate the major shift in investors' sentiment.

Price Target: Rounding tops generally do not lend well to

price targets because the pattern is meandering. In most cases,

one can expect a decline back to the longer term support level.