Ask Colin

I understand a wedge pattern, which starts out with a wide range and gets narrower. However, I am seeing the reverse on a chart – a pattern that starts with a narrow range and gets wider. What is this and what does it mean?

A wedge pattern always starts wide and narrows, by definition.

 

A pattern that starts narrow and becomes wider is well-known in technical analysis under several names – broadening pattern or megaphone pattern and even a five point reversal.

 

When a pattern converges like a wedge, there is an increasing consensus as to value. Volume will also fall away, because both buyers and sellers perceive it as correct value. When something changes to alter the consensus, you get a move away from the pattern and volume picks up.

A pattern that starts with a narrow range (consensus) and then unfolds with wider swings indicates considerable disagreement as to value. Buyers think it is undervalued and drive it up. Then they retreat and sellers think it is too high and sell it off. This is a very difficult pattern to trade, because the eventual failure point is far from clear.

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