Falling Wedges- good for downward breakout in bear market

Wedges that act as reversals of the price trend perform better than continuations. Tall or wide patterns
perform better than short or narrow ones. Wedges with random volume shapes do well.

Identification Guidelines

Table 52.1 shows identification guidelines, of which there are few. Two down-sloping trend lines. As
mentioned before, two trend lines outline the price action. Both trend lines slope downward, with the
top trend line having a steeper slope than the bottom one. Eventually, the two trend lines intersect at
the wedge apex. You can see this in the wedge pictured in Figure 52.2. This wedge forms as part of a
consolidation pattern in an uptrend. Prices oscillate from one trend line to the other several times
before breaking out of the narrowing price pattern in mid-June. Multiple touches. I usually regard five
touches as the minimum necessary to safeguard a good formation. The reason for the multiple touches
is that the price pattern creates several minor highs and minor lows, each succeeding one narrower than
the last. Having a five-touch minimum prevents a price pattern that resembles a rise and gradual decline
from being labeled as a wedge.
Volume trend. The volume trend should be downward. This is not an inviolate rule; it is only a guideline
that usually rings true. For this study, 7 out of every 10 formations show a downward volume pattern.

Think of a falling wedge not as a pattern of weakness, but one of strength, a spring winding tighter and
tighter. As a spring tightens, it shrinks, and so do price and volume in the falling wedge. During a
breakout, the pent-up force releases, and price bursts through the formation boundary and zooms
upward.
The causes of 5% failures can be many. Overhead resistance, as in this case, blocked the upward rise, so
be sure to check for resistance before trading. For downward breakouts, look for nearby underlying
support that may halt a decline.

Reversal or continuation.Wedges split almost evenly between reversals and continuations of the price
trend. Upward breakouts tend to act as reversals, and continuations take a slight lead in downward
breakouts. Reversals tend to outperform, though.

The rise in a bull market is slower than the decline in a bear market. You can see this feature by
comparing the bear market numbers. Upward breakouts take 77 days to rise 26%, but bear markets take
32 days—less than half as long—to drop almost as far, 24%. Thus, bear markets are steeper and reach
the ultimate low quicker than bull markets climb to the ultimate high. Table 52.3 shows failure rates for
falling wedges. The best performance comes from wedges in a bear market with downward breakouts.
They have the lowest failure rates but only for small moves. Once price moves over 15%, then wedges in
the bull market (both breakout directions) outperform. For example, 50% of the wedges with downward
breakouts in a bear market will drop less than 20%, but 44% of the wedges with upward breakouts in a
bull market will fail to rise at least 20%. Thus, if you expect a large move, trade wedges in a bull market
with upward breakouts because they have lower failure rates.