A rising wedge is a fairly common chart pattern, created by a price that is trending higher, but in smaller and smaller moves. The rising, yet converging, price action forms a visual wedge shape and is typically a topping pattern. The converging price action shows it is getting harder for the stock to thrust aggressively upward and buying pressure is waning. In order for a reversal to be confirmed, the price must drop below the support line of the pattern. In three of the four stocks below that breakout has not yet occurred, yet the stocks are struggling to make new highs near the resistance line of the pattern. One stock has already broken the pattern and appears to be heading lower. Depending on the entry point and stop level used for wedge pattern trades, the reward to risk ratio can be quite attractive.
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Brookfield Asset Management (NYSE:BAM) has been riding along the resistance band of a rising wedge since early August. The stock has moved only marginally higher since then, mostly contained within a range between $35.55 and $35. The trend is currently higher, so there may still be some upside left in the stock. As long as the stock remains inside the pattern, or accelerates above it, short selling the stock is a gamble as further upside is as likely as a move to the downside. A drop below $34 penetrates the support line of the pattern and creates a compelling argument for the price to continue dropping. If the downside break occurs, the targets are support between $32.50 and $32, followed by major support just above $30. A stop loss order is usually placed above a recent price swing high.
Boston Properties Inc. (NYSE:BXP) has been in a rising wedge most the year, and since the middle of July has stalled near the resistance line of the pattern. Stiff resistance for the stock has been $112.50 since it first attempted to break it in mid-July. In early August, the stock managed to break the level briefly creating a 52-week high of $113.83. Since then though the stock remains stuck just below $112.50. If the stock breaks back above that mark, it could continue to move to the upside as the range has likely created some pent up energy (conflict between buyers and sellers). Though with upside momentum stalling and volume declining, watch the wedge support level for a potential break to the downside. A drop below $105 breaks the pattern, signaling a decline toward $99 followed by $92.50 if the former is broken.
DR Horton Inc. (NYSE:DHI) created a 52-week high in July of $19.35, which was right along the resistance line of a rising wedge pattern. Since then the stock has retreated, unable to reach that resistance line again. Currently riding the support line of the pattern, it is possible the stock could bounce and make a move towards the upper portion of the wedge at $20. However, a drop below $18 makes it more likely the stock will keep dropping. There is support at $17, but if that is broken the next target is $14.75. Once a downside breakout occurs, if it occurs, a stop order is usually placed above a recent price swing high.
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EQT Corporation (NYSE:EQT) has been in a long-term downtrend, but has been rallying since June. That rally appears to be over though as a rising wedge has been broken. The stock fell below the support line of the wedge on August 23, a strong down day. The move lower occurred in conjunction with declining volume, which peaked in mid-July. There is support just above $52, although a drop below that is likely to be quite bearish given the long-term downtrend. The price target is just above $46.
The Bottom Line
A rising wedge is typically a reversal pattern, although when it will break is unknown until the price actually drops below the support line. Three of these stocks have struggled near resistance, while another has already broken the pattern indicating further declines could materialize. While the patterns can provide attractive shorting opportunities, no pattern works all the time. Risk should be controlled by using stops, and breakout should not be assumed before they occur.
Charts courtesy of stockcharts.com
At the time of writing, Cory Mitchell did not own shares in any of the companies mentioned in this article.