Chart Patterns (Lesson 1)~ The Misleading Rising Wedge
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The Misleading Rising Wedge on Ethereum
Over the past few weeks a prominent trader who I admire has been adamant about Ethereum forming Rising Wedge, which is a bearish reversal pattern. I disagreed with this view but acknowledged the concern raised as any reasonable trader would. However, It caused me a bit discomfort as I have a large position in Ethereum since 2022 BUT I stuck to my guns and held my position.
Folks, this wedge caused me enough discomfort that I needed to dig a little deeper on it and what I found is surprising to say the least. So lets have a look at THE WEDGE.
What is a Wedge Formation?
“Wedges are clearly defined patterns of converging price trend, pointed sharply up or down; they forecast a reversal of the trend which forms them”.
From Richard Schabacker - Technical Analysis and Stock Market profits.
The Rising Wedge will have slightly higher highs and higher lows compressing into an upward leaning point. The Rising Wedge is typically viewed as a bearish reversal pattern as it demonstrates waning price action with smaller thrusts and smaller declines showing a potential exhaustion of price action followed by a sweeping reversal.
The Ethereum Dilemma
On the 4th December 2023 I shared the below picture to illustrate a dilemma, was price forming a Rising Wedge (Bearish Pattern) or an Ascending Triangle (Bullish Pattern)?
Turns out either way it’s not necessarily bearish as a Rising Wedge can continue in an upwards trajectory and breakout to the upside. I have found 4 examples of bullish Rising Wedges that are recent or relevant, I tried my best to find similar price action and structure also.
The four Rising Wedges in the main chart above have a few characteristics that give them an upwards breakout plausibility;
1. Most importantly the On Balance Volume (OBV) indicator is rising. Increasing volume helps the plausibility of continued upwards momentum, whilst decreasing volume would warrant caution of a possible breakdown and reversal of price direction. Remember the Rising Wedge is defined by waning and exhaustive price action (smaller thrusts and declines compressing to a point) and declining volume is suggestive of such exhaustion/lack of interest.
- Going forward we should carefully monitor the volume on Ethereum as Schabacker does warn of false break outs and false break downs in Wedges. In the event volume starts to decline, breaking its trendline or taking out recent lows, this could be an early warning sign that we need to reduce position size and prepare to exit. Just something to keep in mind.
- The volume on Bitcoin and Ethereum for the Rising Wedge bullish thesis is a little rocky compared to the BlackRock and Ultratech charts volume which both have more consistent upward volume pressure. Just another observation.
2. All four charts have a 200 weekly moving average that is slopping upwards with price above it or price eventually establishing above the 200 week.
3. Each target is a measured move by taking the widest two touch points on the thickest side of the wedge and placing that length of width at the breakout point to establish the target (red arrows on charts).
4. The top two charts (BlackRock and Ultratech) show that price struggled once it met the prior all time high. These were stiff resistance areas for price either in the wedge or immediately the wedge for 21 – 26 weeks of consolidation price action.
- In the event this happens with
ETH, we could see significant resistance at $4,600 (All Time High) for a period of 20 odd weeks or something similar. We could at minimum expect resistance at this level as wedges identified illustrate this is a possibility.
5. Another clear pattern on all four Rising Wedges is that prior to wedge formation, the price reached an All Time High, then significantly declined to form the base of the newly forming wedge. I would also argue that the compression or underside angle in all four charts is to a greater degree than the compression from the ceiling forming on the wedge. I realize this is open to your perception, but that’s how I see each charts pattern.
We are now aware that Rising Wedges can be bullish formations and that increasing volume contributes positively towards the possibility of a break to the upside. You might still be wondering…which was Ethereum an Ascending Triangle or a Rising Wedge.
Let’s ask Schabacker....
I would argue that Schabacker’s description below may indicate that Ethereum was in in fact forming an Ascending Triangle.
Schabacker advises under the heading THE WEDGE MUST BE STRICTLY DEFINED “The Wedge must point sharply up or down. A converging pattern which is projected on the chart in a nearly horizontal direction is more apt to partake of the nature of a true triangle, and the student will note that the forecast in that case would be quite different”
Ethereum’s Wedge was not pointing “sharply up” and you could argue that the line was “nearly horizontal” either by degrees or by selecting other very close points of contact. Combine with this my earlier observation that the price underside compression angle was far greater that the upper lines weak slant.
A major reassurance to me in this ETH trade was when I discovered that increasing volume can offset the bearish tone of a rising wedge. It gave me something to monitor and helped keep me on the right side of probability.
I really hope this short review of rising wedges can help you stay on the right side of probability.
PUKA
Over the past few weeks a prominent trader who I admire has been adamant about Ethereum forming Rising Wedge, which is a bearish reversal pattern. I disagreed with this view but acknowledged the concern raised as any reasonable trader would. However, It caused me a bit discomfort as I have a large position in Ethereum since 2022 BUT I stuck to my guns and held my position.
Folks, this wedge caused me enough discomfort that I needed to dig a little deeper on it and what I found is surprising to say the least. So lets have a look at THE WEDGE.
What is a Wedge Formation?
“Wedges are clearly defined patterns of converging price trend, pointed sharply up or down; they forecast a reversal of the trend which forms them”.
From Richard Schabacker - Technical Analysis and Stock Market profits.
The Rising Wedge will have slightly higher highs and higher lows compressing into an upward leaning point. The Rising Wedge is typically viewed as a bearish reversal pattern as it demonstrates waning price action with smaller thrusts and smaller declines showing a potential exhaustion of price action followed by a sweeping reversal.
The Ethereum Dilemma
On the 4th December 2023 I shared the below picture to illustrate a dilemma, was price forming a Rising Wedge (Bearish Pattern) or an Ascending Triangle (Bullish Pattern)?
Turns out either way it’s not necessarily bearish as a Rising Wedge can continue in an upwards trajectory and breakout to the upside. I have found 4 examples of bullish Rising Wedges that are recent or relevant, I tried my best to find similar price action and structure also.
The four Rising Wedges in the main chart above have a few characteristics that give them an upwards breakout plausibility;
1. Most importantly the On Balance Volume (OBV) indicator is rising. Increasing volume helps the plausibility of continued upwards momentum, whilst decreasing volume would warrant caution of a possible breakdown and reversal of price direction. Remember the Rising Wedge is defined by waning and exhaustive price action (smaller thrusts and declines compressing to a point) and declining volume is suggestive of such exhaustion/lack of interest.
- Going forward we should carefully monitor the volume on Ethereum as Schabacker does warn of false break outs and false break downs in Wedges. In the event volume starts to decline, breaking its trendline or taking out recent lows, this could be an early warning sign that we need to reduce position size and prepare to exit. Just something to keep in mind.
- The volume on Bitcoin and Ethereum for the Rising Wedge bullish thesis is a little rocky compared to the BlackRock and Ultratech charts volume which both have more consistent upward volume pressure. Just another observation.
2. All four charts have a 200 weekly moving average that is slopping upwards with price above it or price eventually establishing above the 200 week.
3. Each target is a measured move by taking the widest two touch points on the thickest side of the wedge and placing that length of width at the breakout point to establish the target (red arrows on charts).
4. The top two charts (BlackRock and Ultratech) show that price struggled once it met the prior all time high. These were stiff resistance areas for price either in the wedge or immediately the wedge for 21 – 26 weeks of consolidation price action.
- In the event this happens with
ETH, we could see significant resistance at $4,600 (All Time High) for a period of 20 odd weeks or something similar. We could at minimum expect resistance at this level as wedges identified illustrate this is a possibility.5. Another clear pattern on all four Rising Wedges is that prior to wedge formation, the price reached an All Time High, then significantly declined to form the base of the newly forming wedge. I would also argue that the compression or underside angle in all four charts is to a greater degree than the compression from the ceiling forming on the wedge. I realize this is open to your perception, but that’s how I see each charts pattern.
We are now aware that Rising Wedges can be bullish formations and that increasing volume contributes positively towards the possibility of a break to the upside. You might still be wondering…which was Ethereum an Ascending Triangle or a Rising Wedge.
Let’s ask Schabacker....
I would argue that Schabacker’s description below may indicate that Ethereum was in in fact forming an Ascending Triangle.
Schabacker advises under the heading THE WEDGE MUST BE STRICTLY DEFINED “The Wedge must point sharply up or down. A converging pattern which is projected on the chart in a nearly horizontal direction is more apt to partake of the nature of a true triangle, and the student will note that the forecast in that case would be quite different”
Ethereum’s Wedge was not pointing “sharply up” and you could argue that the line was “nearly horizontal” either by degrees or by selecting other very close points of contact. Combine with this my earlier observation that the price underside compression angle was far greater that the upper lines weak slant.
A major reassurance to me in this ETH trade was when I discovered that increasing volume can offset the bearish tone of a rising wedge. It gave me something to monitor and helped keep me on the right side of probability.
I really hope this short review of rising wedges can help you stay on the right side of probability.
PUKA
注释
Clearly we have two bullish rising wedges in progress with continued rising volume to help our conviction
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