The Broadening Wedge Ascending pattern forms when a security price progressively makes higher highs (1, 3, 5) and higher lows (2, 4), following two widening trend lines. This pattern may form when large investors spread their buying over a period of time.
When initial buying occurs, other market participants react to rising price and jump on the bandwagon to participate. Then value investors begin to sell, believing the price has risen too much, which spurs the original large investor to resume buying again. Once these activities stop, the price may break out in either direction.
Trade idea
If the price breaks out from the bottom pattern boundary, day traders and swing traders should trade with a DOWN trend. Consider selling the security short or buying a put option at the downward breakout price level. To identify an exit, compute the target price for this formation by subtracting the pattern height from the breakout price. The pattern height is the difference between the highest high and the lowest low. The downward breakout level is the last low that touches the bottom line (4).
To limit potential loss when price suddenly goes in the wrong direction, consider placing a stop order to buy back a short position or sell a put option at or above the breakout price.