Section 5:
Bullish Continuation Patterns
Bullish Wedge
Definition:
A bullish wedge starts with a sharp upward move over a short period of time. A bullish wedge forms when a stock reaches and repeatedly retests a horizontal resistance level within the context of a bullish trend.
As the stock pulls back from horizontal resistance, it repeatedly rebounds at increasingly higher support levels. The price action forms a diagonal support level, which eventually converges with the horizontal resistance level.
Nuance:
The bullish wedge is extremely bullish in nature because the buyers are growing increasingly aggressive over time. This aggressive buying usually overcomes the horizontal resistance, which generally forms at psychologically or technically significant price levels. An example of a psychologically significant price level is $100. An example of a technically significant technical price level is a stock’s 52-week high or all-time high.
A bullish wedge can break before the confluence of horizontal resistance and diagonal support. A breakout before the confluence of horizontal resistance and diagonal support is generally a very strong signal that the stock is going to trend higher.
Application:
A bullish wedge is confirmed once stock breaks above the horizontal resistance level. Once broken, the horizontal resistance usually acts as support if the stock pulls back. Repeated and successful retests of previous horizontal resistance are usually a good sign that the stock is going to eventually trend higher. A breakdown below the rising support level rejects the bullish wedge, and generally leads to a short-term bearish trend.
Figure 5.2
Example:
Shares of Potash (POT) traced a bullish wedge with horizontal resistance at $48 as shown in Figure 5.2. Notice how the stock bumped up against $48 on several separate occasions. Buyers stepped in at increasingly higher levels each time the stock pulled back from horizontal resistance. Eventually, the buyers overcame the sellers and the stock broke above $48.
Observe how the stock broke above $48 well in advance of the apex of the bullish wedge. This revealed increasingly aggressive buying and hinted at the eventual bullish trend that followed the formation of the bullish wedge.
Notice how the stock hesitated and pulled back after initially breakout above the $48 horizontal resistance level. But once it was broken, the $48 horizontal resistance level served as support. After successfully retesting the $48 level for the last time, POT trended steadily higher.