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Adviser’s Tip: Falling Wedge Reversal (ANZ)
As traders, we use technical analysis as a reliable method for speculating on future price direction of both equities (shares) and indexes. Technical Analysis in simple terms is the study of historical price movements in a chart in search of patterns or consistently traded support and resistance levels. Today we are looking at a specific chart pattern that falls under reversal patterns, the falling wedge reversal.
A falling wedge occurs when a stock has been trading in a downtrend, creating lower peaks and troughs. A downtrend line is drawn to connect the peaks, and another to connect the troughs. If the lines are parallel, this pattern is instead called a “descending Channel”. If the lines are not parallel and the shape forms a triangle pattern, then you are looking at a Falling Wedge pattern. What the chart is telling you that the stock is becoming more resilient in creating lows and therefore running out of steam.
If the downtrend line that connects the peaks breaks, then it is a strong indication that the next move for the stock may likely be bullish and more importantly provides an entry signal to take advantage of it. Some may want to wait for a close by the previous level of resistance to break also if applicable.
Important Note: This form of pattern analysis is only relevant and accurate if the chart has formed this trend over a period longer than 3 -6 months. Any less and it may be just the stock in a continued downtrend or forming a channel.
Example: Australia and New Zealand Banking Group
ANZ has been in a downtrend for over a year, after a high point in May 2017 where it also formed a Falling Wedge pattern (see below). After reaching the low point of the wedge around the 14th of June, ANZ rose back above resistance levels, and now is forming an uptrend with higher peaks and troughs. The entry of this signal was arguable once the downtrend line broke. More conservative investors may have waited to have more confirmation of an uptrend, which is what we are seeing now and serves as a good entry point.
There are many ways that you could take advantage of this reversal. As a specialist in derivatives, we are able to profit on a stock when it falls as well as when it rises.
If you would like to find out more about this potential opportunity or would like to learn more about trading systems, please call Traders Circle on 03 80805788 and speak to one of our advisers.