Wedge Pattern Example, Potash Corp (POT)

The following stock chart of Potash (POT) offers a great example of a bearish wedge pattern which ultimately lead to lower prices for this once high flying fertilizer stock.

Wedge patterns are a basic form of technical analysis spotted when a series of support and resistance points create a distinguishable wedge like pattern. From left to right the wedge goes from wider to smaller, with a bullish wedge pointing up and a bearish wedge pointing down. Whatever direction the stock decides to break out of the wedge becomes a good entry point for investors to go long or short.

Note: this chart of Potash (POT) stock is a eight month daily chart:

1. The blue 1 show where Potash broke out of a late stage base on strong accumulation volume. For investors the stock would see one more breakout in early June before forming its bearish wedge.

2. The blue 2s show how the bearish wedge was formed through June and July. Since the wedge was pointing down it was classified as bearish and a break down of this pattern (3) was a entry point to go short or sell any long term position in the stock.

3. The blue 3 shows where Potash broke down and had a very heavy distribution day as the stock closed at nearly $180 a share.

4. The blue 4 shows where Potash broke down again as the stock rallied back to $180 in mid August but on this particular day had another heavy volume sell off as the stock gapped down below $170 support. Since this time Potash has tumbled over 15%.

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Comments

  1. Posted by Matt on September 13, 2008 at 11:09 am

    great post Blain, what happens if the wedge breaks in the opposite direction, in this case with POT up instead of down?

  2. Posted by m on September 13, 2008 at 5:41 pm

    Those lines you draw have absolutely nothing to do with bearish or bullish wedge and they don´t fill not even a single most simple lines real wedge presents.

    What you have have on there is clear impulse down.

  3. Posted by Alex - My Trader's Journal on September 13, 2008 at 7:17 pm

    After this beat down on POT I have to think the upside might be better than the downside. I would have bet (and lost) a penny that $150 would hold. Now I up for putting 2 cents on $130 holding. If it does, I'm back in for more profit attempts.
    - Alex

  4. Posted by Blain Reinkensmeyer on September 14, 2008 at 4:32 pm

    Thanks for your comment. A valid argument but please remember that these charts are focused on basic concepts and do not go into specific detail. We do not look at exact angles when distinguishing patterns. Cheers.

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