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Falling Wedge Continuation Wedge Lesson
Tuesday, February 6, 2007

Intraday Update - Technical Analysis of OSTK & OMG

Good morning, this is an intraday update.  Last week the markets had a momentum filled week and the indexes gained over 1%. The Dow Jones Transports confirmed the 52 week highs in the Dow. This is bullish.   Notable gains were made in the in the $CRX, Gold, and Oil and commodities and their sector stocks rallied in general.  This is bullish for the commodities and the transportation sectors.  However, the general market indexes may be at resistance and they are currently range bound with low volatility.  Therefore, until the market asserts itself as to its direction, there may be fewer updates than usual.  We just have to wait and see. If price does not remain static I will issue more updates.  In the meantime, I would like to discuss The Falling Wedge Reversal Pattern and The Continuation Wedge Pattern as well as 2 of our portfolio stocks that are in this pattern.  They are OSTK and OMG.The reason I want to cover this is because it can be a difficult pattern to trade.  Please study the definitions of falling wedge reversals that I have posted below.

Falling Wedge Reversal  - 

"The falling wedge is a bullish pattern that begins wide at the top and contracts as prices move lower. This price action forms a cone that slopes down as the reaction highs and reaction lows converge. In contrast to symmetrical triangles, which have no definitive slope and no bias, falling wedges definitely slope down and have a bullish bias. However, this bullish bias cannot be realized until a resistance breakout. "( per stock charts.com ) Furthermore, a falling wedge reversal occurs only after a stock has already topped.  A falling wedge pattern is a pullback or correction type pattern off of the highs.  A reversal off of the newly formed lows in the wedge will occur only when price moves out of the wedge and retests the wedge thus showing potential for a reversal.  Falling wedge reversals will typically retrace to the 50% / 65% Fibonacci retracement level.  

Continuation Falling Wedge  -

"The falling wedge can also fit into the continuation category. As a continuation pattern, the falling wedge will still slope down, but the slope will be against the prevailing uptrend. As a reversal pattern, the falling wedge slopes down and with the prevailing trend. Regardless of the type (reversal or continuation), falling wedges are regarded as bullish patterns." (per stock charts.com).  In contrast to falling wedge reversals, Continuation Wedges are bullish because they are indicative of a failed topping pattern. These occur when a stock retraces up to the Fibonacci 72% retracement level of a prior move.  It is impossible to tell when that will occur until a stock actually does it. This price action then announces that the pattern is a continuation wedge. You have to have empirical evidence of that occurring. The stock has to retrace to the 72% level.  

Overstock.com - (OSTK) - Daily Chart -Falling Wedge Reversal Pattern  Optionable

The daily chart illustrates that OSTK has just broken out of the falling wedge reversal today. You can see where OSTK bottomed in November and then retested the lows in January.  As you know what fails to break down often break out.  OSTK is reversing and breaking out today.  As you can see OSTK has some nice gains for today so far.   The indicators and oscillators are in a bullish trend reversal.  The Aroon indicator just had a bullish cross to confirm the breakout.  The RSI and PPO are showing bullish divergence.  The Stochastics and  WM% are bullish.   Short term  price target is at 200 EMA around $20.00.  When OSTK hits $20.00,  we will sell it  and then buy it back after a normal retracement. Short term price target is $20.00. 

Overstock.com - (OSTK) - Weekly Chart -Falling Wedge Reversal Pattern  Optionable 

OSTK is a long term investor play.  I believe OSTK is going to go to the top of it's down trending trading channel on the monthly chart.  It will then reach resistance and retrace before it heads back up to the $30.00 area or higher.  There is big money trading this channel.  Long term price target is $30.00.  The chart shows that it has completed it's 5 waves down in an almost text book fashion down and is now ready for a counter trend ABC move up to $20.00.  Furthermore, you can see that the lows are most likely in because volume is drying up.   The indicators and oscillators are extremely oversold. However, the PPO is showing bullish divergence.   I would also like to add that OSTK is heavily shorted, the short interest is 45% of the float.  Investor Play only + 12 months frame.

OMGroup, Inc. - (OMG)- Daily Chart -Continuation Falling Wedge Pattern  Optionable
OMG is a medium risk ethanol swing trade. The daily chart of OMG illustrates that it is in a Continuation Falling Wedge pattern . This pattern forms in an uptrend, therefore it is classified as a continuation, because it pauses before it continues on its uptrend.   Therefore, it is a micro correction.  You can see this clearly on the daily chart.   As you can see, OMG has completed a wave 3 to 4 pullback.  This pullback contains and ABC zigzag move down to the lows and this move forms a Continuation Falling Wedge pattern. OMG has also broken out of the wedge. The breakout is confirmed by a steady surge in volume, a triple cross of the moving averages, and a bullish cross in the Aroon indicator.  The indicators and oscillators are in 123 bullish trend reversal. Minimum price target is  $65.00- $75.00 from an entry around $50.50.   

Edited by Daisy

Andrea Victoria Friend aka Daisy

Editorial Assistant  for Trending123.com

[email protected]

Falling Wedge Continuation Pattern


Implication


A Continuation Wedge (Bullish) is considered a bullish signal. It indicates a possible continuation of the current uptrend.


Description


A Continuation Wedge (Bullish) consists of two converging trend lines. The trend lines are slanted downward. Unlike the Triangles where the apex is pointed to the right, the apex of this pattern is slanted downwards at an angle. This is because prices edge steadily lower in a converging pattern i.e. there are lower highs and lower lows. A bullish signal occurs when prices break above the upper trendline.

Over the weeks or months that this pattern forms the trend appears downward but the long-term range is still upward. Volume should diminish as the pattern forms.

Falling Wedge

Trading Considerations


Pattern Duration
Consider the duration of the pattern and its relationship to your trading time horizons. The duration of the pattern is considered to be an indicator of the duration of the influence of this pattern. The longer the pattern the longer it will take for the price to move to the Target. The shorter the pattern the sooner the price move. If you are considering a short-term trading opportunity, look for a pattern with a short duration. If you are considering a longer-term trading opportunity, look for a pattern with a longer duration.


Target Price
The target price provides an important indication about the potential price move that this pattern indicates. Consider whether the target price for this pattern is sufficient to provide adequate returns after your costs (such as commissions) have been taken into account. A good rule of thumb is that the target price must indicate a potential return of greater than 5% before a pattern should be considered useful. However you must consider the current price and the volume of shares you intend to trade. Also, check that the target price has not already been achieved.


Criteria that Supports


Volume
Volume should diminish as the pattern forms.


Criteria that Refutes


Moving Average
The penetration of the 200-day Moving Average by the price is a false bear signal.


Rising or Stable Volume
Volume should diminish as the pattern forms. If volume remains the same or increases this signal is less reliable.


Underlying Behavior


In this pattern prices edge steadily lower in a converging pattern i.e. there are lower highs and lower lows indicating that bears are winning over bulls. However, at the breakout point the bulls emerge the victors and the price rises.


Although it appears things are changing and the "BULL" is lurking, this pattern is typically "corrective" in nature to a larger trend or pattern. These wedges can typically retrace 50-65% of the FALL before it resumes the primary trend.


Statistics
Percent of successful formations – 81% Average rise of successful formations – 46% Likely rise – 20% Failure rate - 37% Average time to throwback completion – 11 days

Falling Wedge



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OMG
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