Trading What I See

Each of the last four days has had less volume as we keep edging higher, and for the last two days my attention keeps returning to a 15 minute chart. I’ve been watching a WEDGE pattern develop as each upward move becomes weaker and weaker.

First the disclaimer: This is not a prediction. I don’t pretend to know what is going to happen in the future, but when I see a classic chart formation develop I certainly pay close attention.

A wedge occurs when two trendlines pointing in the same direction converge. In order for the pattern to be valid, it is important that the volume contract. Wedges will often be seen at the end of a major move, but sometimes they happen during pullbacks in a trend. That is what seems to be happening now.

There is no question that this wedge meets all the requirements — the question is whether it will act as expected. Wedges have very specific minimum targets. They will quickly move to their starting point, which in this case is the 770 level.

If tomorrow morning the upper trendline is broken (yellow “X”), that does not mean the pattern has failed. A wedge will often have one false breakout before heading for its target. It will be interesting to see how this one plays out since the FOMC policy announcement will be at 2:15 Eastern time tomorrow.

If you want to see a good example of a completed wedge, here is the daily chart leading into the big market break last month. In that case the market took back over 30 days of gains in five trading sessions. Wedges, when they work, can lead to fast profits.

Edwards and Magee: Technical Analysis of Stock Trends