The Broadening Wedge Descending pattern forms when a security price makes lower lows (1, 3, 5) and lower highs (2, 4), forming two downward sloping lines that expand over time (kind of like a pointed down megaphone shape). This pattern may form when large investors spread out their selling over a period of time, and the Breakout can occur in either direction.
When the initial selling occurs, other market participants react to falling price and jump on the bandwagon to participate. Then the value investors begin to sell, believing the price has not fallen enough, which spurs the original large investor to resume selling again.
If 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 by assessing the difference between the pattern’s lowest high (2) and the breakout level. That is the pattern height. The target price can be calculated by subtracting the pattern height from the downward breakout level, which is the last low touching the bottom line.
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.
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