As noted in ChartWatchers two weeks ago, rising wedges are appearing on some key charts and chartists should watch these closely for directional clues. Even though the rising wedge can be a bearish continuation pattern, keep in mind that the immediate trend is up as long as the wedge rises. We should respect this uptrend until proven otherwise. A break below wedge support would reverse this immediate uptrend and signal a continuation of the prior decline. A move below the prior low is then expected and chartists can use the measured move technique for targets. Measure the distance of the prior decline and then subtract this distance from the high of the wedge. The distance can be measured as a percentage move or in points. The image below shows where to find the Percent Change Tool when annotating a SharpChart. It is behind the support-resistance line icon.
The chart above shows the Nasdaq 100 ETF (QQQ) rising within a wedge the last five weeks. The immediate trend is up as long as the green support zone holds. A break below the green support zone would reverse this five week uptrend and signal a continuation of the March-April decline, which was 8.8%. Using the measured move technique, an 8.8% decline from the wedge high would extend to the 81 area. The indicator window shows the Percentage Price Oscillator (PPO) just above the zero line and just above its signal line, which keeps it in bull mode. A break below the signal line would turn short-term momentum bearish. Note that there are also rising wedges forming in the S&P MidCap SPDR (MDY), the Finance SPDR (XLF), the Consumer Discretionary SPDR (XLY) and Nasdaq 100 Equal-Weight ETF (QQEW).
Good weekend and good trading!
Arthur Hill CMT