How to Play the Bearish Rising Wedge Through Options

by John Lansing | October 31, 2012 12:54 pm

Recommendation: Buy to open CNI Jan 2013 80 Puts

To the untrained eye, a bearish rising wedge looks like an uptrend … until it plummets way down. Once you know how to identify this chart using technical analysis, you’ll find plenty of opportunity to benefit from the downside.

A bearish rising wedge is a bearish signal that indicates a reversal from an uptrend. This pattern sometimes is called a bearish continuation wedge because it also can indicate that a current downtrend may continue. Whether it’s a reversal or a continuation indicator, the chart pattern manifests the same way.

How to Spot It

The bearish rising wedge consists of two converging trend lines that slant upward to an apex. This is because prices edge steadily higher in a converging pattern to higher highs and higher lows. Over the weeks or months that a bearish rising wedge pattern forms, it appears to trend upward, but the long-term range is still downward.

This might seem a bit backward — aren’t higher highs and lows a bullish signal? Not necessarily. The “rallies” from the lower trendline become smaller and smaller each time. That makes the upper resistance line less sloped than the lower trendline, indicating a supply overhang.

When prices break below the lower trendline, the bears emerge the victors and the price falls.

The key here is that volume steadily decreases as the pattern forms, which is what makes that break below the trendline significant enough for a bearish trend. If volume remains the same or increases, this signal is less reliable.

Pattern Duration

The duration of the pattern indicates the duration of the influence of this pattern. The longer the pattern, the longer it will take for the price to move to the target. The shorter the pattern, the sooner the price move. If you are considering a short-term trading opportunity, look for a pattern with a short duration. If you are considering a longer-term trade, look for a pattern with a longer duration.

Moving Average

If the price breaks through the 200-day moving average, it is a false bull signal.

How to Play It

Click to Enlarge
The bearish rising wedge is one of the chart patterns I play the most, and railroad stock Canadian National Railway (NYSE:CNI[1]) is a good example. It’s not a huge momentum play, but it has made new swing lows and looks ready to break down.

Recommendation: Buy to open CNI Jan 2013 80 Puts

Today, these puts have been trading in the $1.10-$1.25 range. Take profits when the puts hit my target of $3. Exit the trade if CNI stock rises to $97.

John Lansing tracks the charts all day and offers expert technical analysis in his day trading, options and trading services: Power Trading at the Open[2], Parabolic Options[3] and Trending123[4].

  1. CNI:
  2. Power Trading at the Open:
  3. Parabolic Options:
  4. Trending123:

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