Hewlett Packard HPQ and the Curious Case of the Bearish Rising Wedge Pattern

Sep 4, 2013: 9:18 AM CST

For traders new to trading chart patterns, a textbook example of the Bearish Rising Wedge pattern developed in textbook fashion which can serve as an excellent real-world example for you.

Let’s take a moment to identify the Bearish Rising Wedge Pattern and how it played out perfectly in HPQ shares.

Here’s the bigger picture on the Daily Chart:

HPQ Hewlett Packard Bearish Rising Wedge Trend Reversal Price Pattern

When identifying stocks in bullish trends, one needs to be aware of hidden reversal signals or price patterns such as lengthy divergences and the ominous “Bearish Rising Wedge” price compression pattern (link for a detailed description from the Education Page).

Assuming we don’t know the breakdown outcome, as late as August 13 we would see a strong stock rising in a lengthy uptrend into the $27.00 per share level.

Scratch beneath the surface and we see a lengthy negative momentum divergence that has been developing since the early June 2013 gap-up event.

We can see a similar, though less lengthy (one month) divergence developing then playing out into the April retracement.

Beyond the lengthy or “Multi-Swing Momentum Divergence,” savvy traders could also identify a trendline compression pattern where the lower support trendline was rising at a steeper rate than the upper resistance trendline (that’s key to identifying this pattern).

For reference, the point at which the trendlines cross is called the “Apex” and the same logic holds for classic Triangle Price Patterns.

The combination of the lengthy negative divergence with the compressing trendlines flashed a powerful “Caution” signal and suggested that traders look elsewhere for bullish plays.

It signaled opportunity for very aggressive traders who enjoy playing breakout or reversal outcomes.

Note the large downside sell-day of August 15 which officially triggered a potential “Breakout” trading signal.

The break under the rising trendline should trigger stop-losses from the buyers/bulls; in the same token, it signals entry for bears/short-sellers.  This is the supply/demand dynamic that helps propel the rest of the move which sets up the trade.

For bearish traders, the trigger occurs on a close under the trendline such as the move to $26.00 per share.  The stop is naturally placed above the upper rising trendline or prior price which was intersecting $27.50 per share.

The outcome – or the target – for any type of reversal or breakout event is a large play or sudden impulse move.

Let’s step inside the Hourly Chart for a clearer perspective of the Pattern Development and Outcome:

HPQ Hewlett Packard Technical Analysis Hourly Chart Intraday Trading Tactics Bearish Rising Wedge Breakdown Trend Reversal

We can see the entirety of the Price Pattern from April to August and the initial stages of the breakdown from the Bearish Rising Wedge Pattern and trading opportunity (for aggressive traders).

On a breakdown, downside targets would include any of the 38.2%, 50.0%, 61.8% Fibonacci Levels or any prior price low including the June swing low into $23.00 per share.

Fortunately for short-sellers, price continued to trade lower away from the breakout trendline ($26.50) then collapsed violently in a gap event on August 22nd.

Price then traded toward the $22.00 per share level and the mini-reference level from April and May (see green highlight).

At this point with the breakdown trade in a $4.00 swing trading profit, traders can determine whether to take full or partial profits at this initial level – expecting a potential bounce up – or else hold or re-enter for a possible new breakdown event under $22.00 per share… but that’s another story.

Continue studying the Bearish Rising Wedge Pattern – the logic is flipped for a Bullish Falling Wedge reversal pattern – and use the recent example in HPQ as a great textbook case.

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Corey Rosenbloom, CMT
Afraid to Trade.com

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Corey’s new book The Complete Trading Course (Wiley Finance) is now available along with the newly released Profiting from the Life Cycle of a Stock Trend presentation (also from Wiley).


6 Responses to “Hewlett Packard HPQ and the Curious Case of the Bearish Rising Wedge Pattern”

  1. Netflix NFLX Challenges All Time Highs with Wedge and Divergences | Afraid to Trade.com Blog Says:

    […] we studied recently with a great example in Hewlett-Packard (“HPQ and the Curious Case of the Bearish Rising Wedge”), we can see a similar but tighter recent compression of rising trendlines for shares of Netflix […]

  2. UrMama Says:

    Excellent info, thanks.

  3. Ryan Says:

    How do you deal with gaps and judging the 3/10? Also am I wrong that on your charts you are only showing the fast line?

  4. Corey Rosenbloom, CMT Says:

    Thank you!

  5. Corey Rosenbloom, CMT Says:

    The 3/10 measures the difference in a 3 and 10 period simple moving average, both of which are affected by a large gap (it does skew the value with a large spike as seen on the chart). Gaps – like normal spikes in the oscillator – serve as a confirmation of a move in motion.

    Also, yes I eliminate the signal line to focus solely on the 3/10 differential to emphasize the confirmation or non-confirmation (divergences) with price. I don't use the 3/10 for trading signals or cross-overs.

  6. Ryan Says:

    Gotcha thanks.. I have used the 3/10 for a few years now and am always facinated by how accurate it can be