Bulkowski’s Descending Broadening Wedges

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Descending broadening wedges are mid list performers, found most often with upward breakouts in a bull market. Downward breakouts are quite rare. As with other broadening patterns, partial rises and declines predict the breakout direction. Partial declines work particularly well but are difficult to distinguish from the pauses that normally occur as price bounces from trendline to trendline. For more information see pages 98 to 114 of the book Encyclopedia of Chart Patterns, Second Edition and the following...

Important Results

Identification Guidelines

Trading Tips

Example

Descending broadening wedge chart pattern appears

Important Bull Market Results

Overall performance rank for up/down breakouts (1 is best): 12 out of 23; 11 out of 21

Break even failure rate for up/down breakouts: 6%; 9%

Average rise/decline: 33%; 20%

Throwback/pullback rate: 53%; 53%

Percentage meeting price target for up/down breakouts: 79%; 36%

Identification Guidelines

Characteristic	Discussion
Price trend	Can be up or down leading to the pattern
Shape	A megaphone tilted down.
Trendlines	Both trendlines slope downward.
Touches	At least two peaks and two valleys should touch their respective trendline.
Volume trend	Trends upward.
Breakout	Can occur in any direction but 55% of the time it breaks out opposite the prevailing trend.

Trading Tips

Trading Tactic	Explanation
Measure rule	For upward breakouts, use the highest peak (A) in the chart pattern as the target. For downward breakouts, compute the difference between the highest peak (A) and the lowest valley B in the chart pattern to get the height. Multiply the height by the above "percentage meeting price target" and then subtract it from the lowest valley (B) to get a price target.
Intraformation trade	Short at the top (1) when price heads down. Cover at the bottom trendline (2). Do not buy at the bottom because of the down-sloping trend tends to cut profits short.
Buy at 3rd touch	When price touches the bottom trendline for the third time (see point 3) and begins rising, buy. Price may breakout on the following trip across the chart pattern.
Short at the top	When price touches the top trendline (1) and begins falling, sell or sell short.
Partial rise	A partial rise works just 14% of the time, so don’t rely on it.
Partial decline	A partial decline works 87% of the time
Price trend	For upward breakouts, the best performing patterns are those with an intermediate-term (three to six months) rise leading to the pattern.
Yearly low	For downward breakouts, the best performing are those with breakouts within a third of the yearly low. For upward breakouts, performance is constant.
Volume trend	Downward breakouts do best when volume was trending up. Upward breakouts show better postbreakout performance when volume trends downward throughout the pattern.
Breakout	The breakout direction is upward 79% of the time.
Throwbacks and pullbacks	Throwbacks hurt postbreakout performance but pullbacks help.

The Measure Rule

Example

Descending broadening wedge chart pattern example

The above figure shows an example of a descending broadening wedge chart pattern. The formation begins at point A. This long and loose descending broadening wedge is typical for this chart pattern type. A partial decline forms at B, and that might be the only redeeming feature of this chart pattern. However, price breaks out upward and reaches the target within a week of the breakout. The target appears as the dashed green line on the chart.