HOLLOW POINT TRADING
What is a Rising Wedge?
A rising wedge is a bearish chart pattern characterized by two upward-sloping trendlines that converge as the pattern progresses. Both the support line (connecting higher lows) and resistance line (connecting higher highs) slope upward, but the support line rises at a steeper angle.
Despite making higher highs and higher lows—typically considered bullish—the narrowing price range and decreasing momentum signal that buying pressure is exhausting. The pattern typically resolves with a breakdown through the lower trendline.
⚠️ Bearish Pattern Alert
Rising wedges are considered bearish because the converging trendlines show buyers losing steam. Each rally makes a smaller gain than the last, while sellers become increasingly aggressive at lower prices.
Pattern Characteristics
Identifying a Rising Wedge
- At least two higher highs touching upper trendline
- At least two higher lows touching lower trendline
- Both trendlines slope upward
- Trendlines converge (pattern narrows over time)
- Volume typically decreases as pattern develops
- Breakdown usually occurs in lower third of pattern
Why Rising Wedges Are Bearish
The Psychology Behind the Pattern
Each rally within the wedge covers less ground than the previous one—buyers are running out of conviction. Meanwhile, sellers are willing to step in at progressively lower prices, showing increasing bearish pressure.
The converging lines represent compression of energy. When the pattern finally breaks, the pent-up selling pressure is released, often resulting in sharp, fast moves lower.
Volume confirms: Declining volume during the pattern's formation shows waning buyer interest. A volume spike on the breakdown confirms the bearish resolution.
Where Rising Wedges Form
In Uptrends (Reversal Pattern)
When a rising wedge forms after an extended uptrend, it signals that the rally is exhausting. The breakdown marks the beginning of a new downtrend or significant correction.
In Downtrends (Continuation Pattern)
When a rising wedge forms during a downtrend, it's essentially a bear flag in wedge form. The pattern represents a countertrend rally that fails, with the breakdown resuming the prior downtrend.
Trading the Rising Wedge
Entry
Short on close below lower trendline (support break)
Stop Loss
Above the most recent swing high within the wedge
Target
Height of wedge at widest point, subtracted from breakdown
Confirmation
Volume spike on breakdown; failed retest of broken support
Entry Strategies
Aggressive: Enter short immediately on the close below the lower trendline.
Conservative: Wait for a retest of the broken trendline (now resistance) and enter on rejection. This provides better risk/reward but you may miss fast breakdowns.
Very conservative: Wait for the first lower low after the breakdown to confirm the new downtrend.
Trade Management Tips
- Trail stops as price moves in your favor
- Take partial profits at measured move target
- Watch for support levels that may cause bounces
- Be prepared for throwbacks (retests of breakdown level)
- Rising wedges often break down faster than they formed
Common Mistakes to Avoid
Shorting too early: Don't anticipate the breakdown. The pattern isn't confirmed until price actually breaks the lower trendline.
Ignoring context: Rising wedges in strong bull markets may break upward instead. Always consider the larger trend.
Forcing the pattern: Not every converging price action is a wedge. Require clean trendlines with multiple touches.
Skipping confirmation: Wait for a close below support, not just an intraday breach. False breakdowns do occur.
Key Takeaways
Rising wedges are reliable bearish patterns that signal exhausting momentum despite technically making higher highs. Look for them at the end of uptrends or as continuation patterns within downtrends. Wait for confirmation, manage risk with stops above the wedge, and target the measured move. Remember: the breakdown is often sharp and fast.