Usually when a person is watching a stock's price steadily sink, the assumption is that the stock must be in trouble. This is sometimes the case, but there are some instances in which the stock is in fact creating a very bullish pattern known as the descending wedge.
Just as an ascending wedge (see Chapter 4) is a bearish pattern, the descending wedge is a bullish pattern. It consists of two nonparallel lines that, if extended, will meet on their right side. As the price bounces up and down between the two extremes, the price action becomes more compressed as the bullish and bearish reactions draw the lines closer together. If and when the prices break the upper trendline, the descending wedge pattern is complete, and the stock should move higher in price.
DEFINITION OF THE PATTERN
The graph of FEI Company (symbol FEIC), shown in Figure 8.1, went up 56 percent after its breakout from the descending wedge pattern. The two trendlines look parallel, but the higher one is descending at a slightly faster rate than the lower one.
The descending wedge is bounded by these two lines. As long as the price bars between the lines are moving lower (descending) and the lines are angled such that they will eventually converge on their right side (wedge), the pattern is valid. Whether the stock is in a general uptrend or downtrend doesn't matter. If the stock is in a broad uptrend, the descending wedge is a continuation pattern; if the stock is in a broad downtrend, ...