Price patterns of the “Inverted Triangle” shape, having a horizontal Top orBottom boundary, occur about as often as the symmetrical type, which is tosay, not nearly as often as true Triangles, Rectangles, etc. In the mid-20thcentury, there were very few of them (EN9: Still scarce in the 2000s). Whilethe true Right-Angle Triangle with a horizontal top line and up-slantingbottom line is called an Ascending Triangle, just as its counterpart with ahorizontal bottom boundary and a down-slanting top boundary is called aDescending Triangle, we cannot apply these terms to the Inverted or Broadening Forms. Generally speaking, Right-Angled Broadening Formationscarry Bearish implications, regardless of which side is horizontal, in nearlythe same degree as the symmetrical manifestations.
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Obviously, however, they differ essentially from Symmetrical formationsin one respect: a horizontal side indicates either accumulation or distributionat a fixed price, depending, of course, on which side is horizontal. And itfollows, logically, that any decisive break through that horizontal side hasimmediate forceful significance. Thus, if a Broadening Price Pattern with aflat top boundary develops after a good advance, and if prices finally burstup through that top line on high volume and close above it to a conclusiveextent (roughly 3%), then it is safe to assume that the preceding uptrend willbe resumed and carried on for a worthwhile move. This does happen,although it is rare. The odds favor the opposite, i.e., the eventual victory ofthe forces of distribution which created the horizontal Top and a breakawayinto an extensive decline.Moreover, if an advance is to ensue from a Flat-Topped BroadeningFormation, the chances are that the third reaction in the formation will beattended by much diminished trading activity instead of the continued highor irregular volume which is characteristic of Bearish Broadening Movements, and that either it or the fourth reaction will be halted and reversedabove the low point of the preceding. This turns the formation into a Consolidation Head-and-Shoulders, a Continuation-of-Trend Pattern, which we shalltake up in Chapter 11. The message here for the trader owning a stock whosechart begins to develop a Broadening Formation of this type is: watch thethird reaction. If it carries below the second and volume does not fall off toa marked degree, sell out on the next rally. (You can always repurchase thesame stock if you wish, without much “loss of position” should prices finallyand, improbably, recover and push up through the Top.)Right-Angled Broadening Formations with horizontal lower boundaries(flat Bottoms) almost always break down. Once prices have fallen below thelower boundary line, there is frequently a Pullback Rally to that line, eitherin a few days or in 2 or 3 weeks, similar to the Pullbacks that so often followthe break down from a Head-and-Shoulders Top.(Note that the third or fourth rally in a pattern which starts out as a FlatBottomed Broadening Formation may fail to carry prices as high as itspredecessor, in which case we have a Head-and-Shoulders to deal with. Inother words, every Head-and-Shoulders begins as a Broadening Formation.And the statement of that relation takes us logically to our next type ofReversal picture.)
The DiamondThe Diamond Reversal Formation might be described either as a more or lessComplex Head-and-Shoulders with a V-shaped neckline, or as a BroadeningFormation which, after two or three “swings,” suddenly reverts into a regularTriangle which is nearly always of the Symmetrical form. So far as theaccompanying volume pattern is concerned, the latter is possibly the betterdescription. Its name derives obviously from its pictorial resemblance to theconventional diamond figure.
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28ASSOCIATED DRY GOODS
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FIGURE 91. Three successive reactions in “DG” in February–March 1945 madesuccessively lower Bottoms, but the intervening rallies came up to the same high(about 21¼), thus forming a Right-Angled Broadening Formation with a horizontalTop (Supply) Line. Penetration of this technically important top line on April 16 wasa Bullish signal. The flat-topped type of pattern does not necessarily portray a Bearishsituation.
Although it is fairly conspicuous and easily detected when it appearson the charts, the Diamond is not a common pattern. Since its developmentrequires fairly active markets, it rarely occurs at Bottom Reversals. Its “natural habitat” is Major Tops and the High-Volume Tops which precede extensive Intermediate Reactions. Many Multiple Head-and-Shoulders Formations are borderline Diamond cases; i.e., they permit the drawing of slightlybent necklines. The reader is cautioned, however, against trying too hard tomake Diamonds out of price patterns of the Head-and-Shoulders type. Thereis a temptation to do so because a V-shaped neckline may promise to givean earlier (and, hence, more profitable) breakout signal than the straightneckline of the Head-and-Shoulders, but it is much safer to stick to the latterunless the second half of the formation consists of a series of clean-cut,converging Minor Fluctuations which plainly demands definition by converging boundary lines, and unless activity shows some tendency to diminish during this period as it would in a Triangle.The Diamond requires little further comment. Our illustrations will suffice to acquaint you with its typical details. It carries a minimum measuringimplication which, having studied the Head-and-Shoulders and Triangleformulas, you can probably deduce for yourself. Prices should move at leastas far from the breakout point as the greatest width in points of the pattern
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807672686460PARAMOUNT PICTURES
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56Sales100’s125100755025MARCHAPRILMAYJUNEJANUARY FEBRUARY5 12 19 26 2 9 16 23 2 9 16 23 30 6 13 20 27 4 11 18 25 1 8 15 22 29
FIGURE 92. The 1946 Top in Paramount Pictures, from which it fell to 46 a yearlater, was a Right-Angled Broadening Formation with a horizontal bottom line whichwas “cracked” the first week of June, but not decisively broken until June 20. (Thisstock was later split 2-for-1.)
from its Top (head) to Bottom (V in neckline). This, it must be emphasized,is a minimum rule and subject only to the usual qualification that a ReversalFormation must have something to reverse. Generally, the new trend carriesprices eventually well beyond the minimum measurement.
Wedge FormationsAll of the chart formations we have discussed up to this point can and dodevelop at changes in the Major Trend of prices. A few of them seldom occurat any other than a Major Reversal. We have now to consider three patternswhich are ordinarily Minor, or, at most, only Intermediate in their trendimplications. They are useful, nevertheless, in trading operations. One ofthem, the Wedge, we have already alluded to (in Chapter 8) as having someresemblance to the Triangles.The Wedge is a chart formation in which the price fluctuations areconfined within converging straight (or practically straight) lines, but differing from a Triangle in that both boundary lines either slope up or slopedown. In a Symmetrical Triangle, the Top border slants down, while theBottom border slants up. In Right Angle Triangles, one boundary slopeseither up or down, but the other is horizontal. In a Rising Wedge, bothboundary lines slant up from left to right, but since the two lines converge,
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FIGURE 93. Another example of the Flat-Topped type of Broadening Price Patternthat appeared near the end of 1945. “LS” went on up to 63 in 1946. Prices broke outof this formation with a Breakout Gap (G) and another Breakout Gap appeared onDecember 3. G-G marks an “Island.” See Chapter 12 for Gaps.
the lower must, of course, project at a steeper angle than the upper. In aFalling Wedge, the opposite is true.Superficially, one might think that since an Ascending Triangle, with onehorizontal and one up-line, is a Bullish picture, the Rising Wedge, with bothof its pattern lines up, should be even more Bullish. But such is not the case.Remember that the flat top of an Ascending Triangle signifies a supply ofshares being distributed at a fixed price; when that supply has been absorbed(and the rising lower boundary line indicates that it will be absorbed), thepressure is off and prices will leap forward. In a Rising Wedge, on the otherhand, there is no evident barrier of supply to be vaulted, but rather, a gradualpetering out of investment interest. Prices advance, but each new up waveis feebler than the last. Finally, demand fails entirely and the trend reverses.Thus, a Rising Wedge typifies a situation which is growing progressivelyweaker in the technical sense.Of course, it might be said that any advance in prices, no matter whatshape it may take on the chart, weakens the technical status of the market.Prospective buyers are — or, at least, should be — more reluctant to payhigh prices than low, and owners are more willing to sell at high prices thanat low; in other words, any sort of rise tends to increase supply and diminishdemand. (While theoretically true, the preceding statement must be qualifiedby the fact that rising prices actually attract rather than discourage public
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FIGURE 94. The 1946 Bull Market Top in U.S. Steel was a 3-month Diamond whichmight also be construed as a Head-and-Shoulders.
24AMERICAN BOSCH CORP.
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FIGURE 95. A Diamond (November) which broke out topside and thus functionedas Consolidation rather than Reversal.
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FIGURE 96. Diamond Reversal Formations are often easier to detect on weeklythan on daily charts. Trace out the price swings and volume in this May–June 1946Diamond in Shell. Note also the remarkable Descending Triangle which developedfrom September 1946 to February 1947, and the March Pullback to its apex, anotherideal place to sell short.
buying.) The difference between a Rising Wedge and what might be calleda normal Uptrend Channel (of which we shall have more to say later) is thatthe Wedge sets a sort of limit on the advance. Its converging boundary linesfocus on a point near where the advance will halt and reaction set in.We can state most of the essential facts about the Up-Pointed WedgeFormation in a few short sentences. It can develop either as a sort of ToppingOut Pattern on a previously existing uptrend, or start to form right at theBottom of a preceding downtrend. It (the Wedge) normally takes more than3 weeks to complete; a shorter pattern of this shape is nearly always betterclassified as a Pennant, which we will discuss in the next chapter. Pricesalmost always fluctuate within the Wedge’s confines for at least two thirdsof the distance from the base (beginning of convergence) to the apex; in manycases, they rise clear to the apex, and in some, they actually go a shortdistance beyond, pushing on out at the Top in a last-gasp rally before collapsing. Once prices break out of the Wedge downside, they usually wastelittle time before declining in earnest. The ensuing drop ordinarily retracesall of the ground gained within the Wedge itself, and sometimes more.Trading volume in a Wedge tends to follow the regular Triangle Pattern,diminishing gradually as prices move up toward the apex of the Wedge.
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INDU LAST-Daily 10/04/200111500
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FIGURE 96.1. Technicians in the future will look back with amazement at the topwhich put the exclamation point on the Bull ’90s. The most amazing thing being thatwhat was going on at the time was recognizable and subject to analysis with a ruler(Cf. Resources). The analysis furthermore indicated that the party was over (or atleast the fat lady was in the process of singing). As Edwards noted the BroadeningTop which had (and has) implications of its own morphed into a Diamond, which threwoff a false signal, breaking out on the upside, which developed into another triangular-like pattern (could be looked at as ragged triangular or ascending — onlybottom line shown here), which after a head fake broke down made a modified VBottom and returned to the top of what could be looked at as a monster rectangle.The top horizontal line, drawn in August 2000 stops the 2001 rally cold and fromthere it is a slippery slide to the tragedy of September 11, 2001. It was obvious thatthe investor had no business being long, and that trading strategy was in order. Wasthere any prescience in recognizing the mulish sideways trend of the market? Nonewhatsoever. Is all this hindsight? The reader may see for himself by examining therecord of how this market was analyzed at the time by the John Magee InvestmentNewsletter in Resources.
The Falling WedgeExcept for the fact that it is pointed down, the Falling Wedge appears in allrespects like the rising form we have just described. But the price trend thatfollows its completion differs in character. When prices break out of a RisingWedge, they usually fall away rapidly, but when they move out of a FallingWedge, they are more apt to drift sideways or in a dull “Saucering-around”movement before they begin to rise. The Rising Wedge may, therefore, callfor quick action to secure profits, while with a Falling Wedge, the traderordinarily can take his time about making his commitment for the ensuingrise.
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FIGURE 97. Hudson is another stock that ended its Bull Market in 1946 with aMajor Diamond which could also be taken as a Complex Head-and-Shoulders. Thisformation was plain on the weekly chart but hard to see on the daily. Note how theDiamond gave a sell signal about 2 points higher than the Head-and-Shoulders. The14½ to 17½ area at the end of the year, when construed as a weak Rectangle, wasbarely fulfilled in February 1947.
Both types should be well defined on the chart. Unless a trend patternis quite compact with frequent fluctuations, and nicely bounded by lineswhich clearly converge to a point, and unless their up (or down) slant ismarked, the Wedge construction must be considered doubtful. You will findborderline cases where one of the pattern lines so nearly approaches thehorizontal in direction that it resembles a Right-Angle Triangle, and the latterwould, of course, carry quite different implications for future trend development. It is difficult to lay down any hard and fast rules for distinguishingthe two. If one boundary line is nearly horizontal, or if the daily closing pricestend to fall at about the same level, then the formation is more safely construed as a Triangle. The reader need not let this problem worry him unduly,as he will rarely be left in doubt for long after he has acquired a little experiencewith charts. One soon gets to recognize the characteristic “symptoms” of thedifferent formations and make correct diagnoses almost instinctively.
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FIGURE 98. As U.S. Steel approached the Top of its Secondary Recovery in August1937, its price fluctuations tended to grow narrower, between upward sloping butconverging boundaries, while volume diminished. This pattern — a Wedge — carrieda definitely Bearish message. The entire swing from July to the end of August wasessentially a Rounding Top. The three Gs mark Breakaway Gaps (Chapter 12), thelast (September 7) made as prices broke down through a Support Level (Chapter 13).
Wedges on Weekly and Monthly ChartsMost true Wedges are too short-lived (seldom longer than 3 months) to takeon a recognizable definition on a monthly chart, but they may be spottedoccasionally on the weeklies. Long continued, gradual downtrends, whenplotted on arithmetic scale, sometimes assume the Wedge form. Thus, anentire Major Bear Decline on any arithmetic monthly chart may appear likea giant Falling Wedge. This is due to the fact that the up and down fluctuations which compose the Major Swing, while maintaining about the sameextent in percentage, tend to shorten in terms of points (dollars) as pricesmove from higher to lower levels. Such Major chart patterns are not, ofcourse, the true Wedges we have discussed herein. When plotted on semilogarithmic scale, these same moves would normally show a Parallel or evenslightly widening, instead of Converging, Channel.
Rising Wedges Common in Bear Market RalliesAs a final note, we might add that the Rising Wedge is a quite characteristicpattern for Bear Market Rallies. It is so typical, in fact, that frequent appearance
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721936686460565248LOEW’S , INC.
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FIGURE 99. An “ideal” Falling Wedge that developed in Loew’s in 1936. Notevolume trend therein, irregular but generally diminishing. July produced a smallFlag (Chapter 11), and at the end of the year, “LW” went into a Rectangle out ofwhich prices “skyrocketed” to 75.
of Wedges at a time when, after an extensive decline, there is some questionas to whether a new Bull Trend is in the making may be taken as evidencethat the Primary Trend is still down. When a Major Bear Swing ends in aHead-and-Shoulders Bottom, the last Rising Wedge will often appear asprices rally from the left shoulder to the neckline, and just before they breakdown to the head (final low). A Rising Wedge on an arithmetically scaledweekly chart is almost invariably a Bear Market phenomenon, expressing,as it does, the diminishing vigor which is the normal property of any reactionagainst a prevailing Primary Trend.
The One-Day ReversalWe referred in Chapter 6 to a price pattern known as the One-Day Reversal.This particular technical Reversal indication, when taken alone, can beaccorded only temporary or strong Minor Trend significance. True, it mayappear at the very peak of a long advance, forming perhaps on the high dayof the head in a Head-and-Shoulders Pattern which will be followed by along decline, but it can hardly be credited with forecasting that entire decline;all it really signaled was the turn in the “head” itself. A One-Day Reversal
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9688807672686460565248SCHENLEY DISTILLERS
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FIGURE 100. Wedges seldom appear at Major Trend Reversals, but Schenley’s Bullhigh in 1946 was made at the end of an 8-month Rising Wedge, plain to see on itsweekly chart. The dashed line at 60 marks a Support Level (see Chapter 13) whichserved to stem the subsequent decline for 9 weeks.
JANUARY FEBRUARY
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OCTOBER NOVEMBER DECEMBER
TRANSCONTINENTAL & WESTERN AIRLINES
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FIGURE 101. There are many interesting and technically significant features in this 12-month daily chart record of“TWA.” Note the extraordinary One-Day Reversal, December 3, which marked its Major Top. Although the next 4 weeksproduced a sort of poorly formed Descending Triangle, the Reversal Day was the only clear-cut and unmistakable signalto sell. When you study pennants, turn back to this chart for its November Pennant. Its long Intermediate Down Trendlinewas tentatively broken in August 1946 but without confirming volume (see Chapter 14). Note that at no time during thedecline did a “Buy” Pattern appear.
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may just as well occur, for example, at the beginning (the first peak) of aSymmetrical Triangle which only Consolidates instead of Reversing the previous uptrend. Even so, it serves, as you can see, to warn us of at leasttemporary exhaustion of Bullish forces.On the downside, a One-Day Reversal often appears in magnified andconspicuous form at the end of a Panic Sell-Off, in which case, it usually isreferred to as a Climax Day or Selling Climax. This manifestation of it hasspecial significance which we shall take up later. First, however, just whatis a One-Day Reversal?It is, to begin with, a day of unusually high volume, exceeding, as a rule,by a notable margin any trading turnover registered in any one marketsession for several months past. It comes after a fairly long and steadyadvance (or a similar decline), on which activity has been increasing gradually. Prices push right ahead from the opening gong as if nothing couldstop them. Frequently, even the opening sales are so far beyond the previousday’s closing level as to leave a large gap on the chart. (We shall discussgaps later.) The tape runs late, and before the advance (or decline) halts,prices have been carried as far in an hour or two as three or four days wouldordinarily take them. But the halt does come finally, maybe at the end of thefirst hour or perhaps not until late in the day. Then quotations “churn,”registering only fractional changes to and fro, with the tape still “fast” andoften running late by spurts. Suddenly the trend reverses and prices movejust as rapidly in the opposite direction. The session ends with a final burstof activity that puts the price at the close right back where it started the day.There has been an enormous amount of activity, and quotations may havetraversed intraday a percentage range of 2 or 3%, but the net change fromthe previous day at the end of trading is very small.One-Day Reversals at Tops appear quite often in the charts of individualstocks which are thin (relatively small floating supply of shares), which havehad an active advance and have attracted a large public following. Theydevelop rarely in the Averages. Selling Climaxes (One-Day Reversals atBottoms), on the other hand, are found conspicuously in the Averages at theend of many abnormal or Panic Declines.One-Day Reversals, as we have already stated, do not carry Major Trendimplications. The nimble in-and-out trader can capitalize on them — maybepick up several points if he has funds available and jumps in at the rightmoment. But, as a rule, the new trend (i.e., the trend at the close of the day)does not carry very far right away; prices usually “work” around in thenearby ranges for some time and build some sort of area pattern before theymove away in a swing of Intermediate proportions. However, the One-DayReversal, as a phenomenon that occurs frequently within or at the start ofmore pregnant technical formations, gives an important clue to probabletrend developments. In any event, it is an urgent warning to watch closelythe chart in which it has appeared to see what pattern of price action mayfollow and be prepared for the worthwhile move when it comes.
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