Thoughts on wedges

[troyresearch]

Attached is a chart of SkyePharma, until recently the least-loved part of my LT portfolio. Looks like a falling wedge is forming on this. Anyone got any idea how reliable a pattern this is (ie what its failure rate is?)

Rgds

Troy

 

[esiotrot]

I'm not sure that I see a wedge here. Generally a wedge is a consolidation pattern that forms against a prevailing trend with both demand and supply trendlines either rising or falling.
A rising wedge in a falling trend is a continuation pattern and a rising wedge in a rising pattern is a reversal pattern. Vice versa for falling wedges. As for the reliability....?

SKP could be forming a symmetrical triangle starting mid December '00

Basically my reading of SKP is that since the aberration in Feb/March 2000 it has stuck to a trading range 65 to 105. So, if I was tempted I would be looking at the action between these extremes using Bollingers and an indicator such as CMO or RSI as an overbought/oversold flag.

 

[troyresearch]

When's a wedge a triangle?

Hi Peter

Thanks for your thoughts. Still finding my feet in this I'm afraid I'm still finding it hard to distinguish between a triangle and a wedge, so the explanation of how these work is appreciated. I've just had another look at this and remain convinced it's a wedge, based on the explanation for the latter in Thomas Meyers' 'The Technical Analysis Course':

1. Prices fluctuating between two converging boundary lines; for a rising wedge, the boundary lines are slanted upward with the lower line being at a steeper angle than the upper line. For a falling wedge, the boundary lines are slanted down and the upper line is at a steeper angle than the lower line.

2. Trading volume in a wedge gradually diminsihes as prices move toward the apex of the wedge.

Of course I could be reading this all wrong, so do correct me if you think this to be the case. I'll only learn from my mistakes...

Rgds

Troy

 

[Skimbleshanks]

My understanding of wedges and triangles is as follows:

In a wedge, both trendlines are rising, or both are falling

In a triangle, one trendline is rising and one is falling.

And, of course, the trendlines are drawn from the highest point (in SKP's case on Feb 26 at 108) to the next highest (April 20 at 97p) - this trendline goes down

The other trendline is drawn from where the price bars 'drop and bounce' (March 22 at 71p) and the next bounce (May 4 at 86.5p) - this trendline goes up.

Therefore it's a triangle! The definition of a triangle is that it needs a minimum of two touches on the top trendline and two touches on the bottom trendline - these are quite weak and the more touches the stronger the triangle.

Triangles take between 1 and 3 months to form, and pennants take between 1 and 3 weeks to form. Both these form after large, fast moves (such as with SKP from Jan 4 to Feb 26. They are just 'breathers' usually before the stock carries on its way - so if it was going up before the triangle formed, it is likely to breakout going up (and vice versa of course).

And just to bore you rigid (if I haven't done so already), here are some statistics on triangles with breakouts to the upside from the Encyclopaedia of Chart Patterns.

Failure rate: 5%
Average rise: 37% ( most likely rise being 20%)
Volume trend: downward
Premature breakout: 14%
Throwbacks: 58%
Percentage meeting predicted price target: 81%