My outlook of an increasing wedge is technically confirmed while you assess the following: The strong volume, and over a number of weeks, it is a catching range-bound trade. You will observe the higher highs and higher lows along with slowing volume. Usually what happens next is a distinct break lower on solid volume.Why Does It Happen?
As with most reversal patterns a rising wedge scenario is no different. You have an up trend rally that at first observation appears to be in an upward direction with a series of higher highs and lower highs. The flow of information from the media is collectively encouraging. The research houses are out there raising their forecasts for the stock; this has the share rate, earnings and 12 month targets. What is really happening is that the stock is being sold off to the retail investor. The experiment and institutional traders are selling off to the inexperienced mum and dad investors, the less able or short term speculator. This is all about manipulation and deception.
The pattern embarks on a high profile or sentimental stock; it rises to a new high and proceeds upwards after strong volume. Trend trading and the exhilaration contribute to the rise in the surging share price. On the face of it the fundamental outlook appears solid.
As the share cost rises to a new high, uncharacteristically the volume retracts and the share prices decline quickly to a reaction low. The media and research analysts notify us the stock is plainly taking a breather; they hold the sell off by requiting the long term advance. They restate their buy ratings once more. Then again the share price rises to an all time high BUT the volume deteriorates and the price begins to weaken. It is easy to understand at face value the bullish sentiment when the company rises, its guidance, wins lucrative contracts, develops new products and good media attention.
Therefore, underlying handling is being carried out as the experience traders and long term investors sell their positions, they distribute their holdings on every good piece of information in the media - while the share price reacts to the downside. The low is higher than the old answer low and forms the appearance of a wedge on the chart. Then after a number of sessions of consolidation more good news is released by the analysts and new wires. The share price again rallies to a new high.
During the preceding two rallies the volume is reduced which caused the share price to rapidly begin to weaken. Those same analysts who previously reported on the stock again remain resilient as there is no fundamental occurrence to account for the weakness.
Again research houses reiterate their buy ratings, advising clients to buy and build on weakness. While the longer term experienced traders /investors are selling into the market.
By this time the latest advice has no effect and the price declines rapidly. The media and research houses again promote their advice but to no avail. Before long the wedge pattern structures are breached
Almost immediately after, the support at the reaction level is violated. What happens next is the news is quite negative and the inexperienced traders, the speculators and up-to-date investors panic, the price plummets. After several weeks the stock is trading back at its intermediate level of resistance.
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