Shares in healthcare firm Net Savings Link have been tracing out a large falling wedge since February 22nd which saw the share price fall 75% from its highs. Falling wedges are intrinsically bullish patterns and on March 5th, the price broke out to the upside. The stock has been fluctuating higher since. The question now is how high can it be expected to go?
Figure 1 shows the hourly candlestick chart. Notice the steady contraction in volume throughout the formation of the wedge.
This is typical volume behaviour associated with this pattern, and volume declining to historically low levels is usually a precursor to a breakout, as was the case here. Volume is usually expected to start to expand on breakout and continue rising throughout the rally following a breakout of a falling wedge. This volume expansion is yet to materialise, which may be cause for minor concern for bulls. It may be that the current rally lacks the capital commitment behind it to sustain a full 1:1 price projection target. Nonetheless, the pattern is still confirmed as a bullish formation, and the successful breakout to the upside is encouraging. Let’s consider how a price target may be derived.
The most conventional way to calculate targets for a falling wedge is using the 1:1 minimum price projection method. See figure 2.
The vertical height of the base of the wedge is measured. This is a measure of price displacement. That measurement is copied exactly and projected upwards from the point of breakout, in this case yielding a target of 0.070383. If this target is met, it would require a 100% rise from the current price.
The target lands at a very interesting price level for a number of reasons. Firstly, because of its close proximity to the previous high at the base of the wedge, shown in figure 3. It is a rudimentary concept in technical analysis that prices are likely to reverse from prior support and resistance levels, which gives this target an added degree of credibility.
Now, consider figure 4. It shows a Fibonacci extension of the final downswing of the wedge.
The range from the high at A and the low at B is taken as the base range. It is common for trends to find support or resistance at Fibonacci extensions of the final swing of the prior trend. Taking and extending the range AB, the 2.618 extension lands almost exactly on our original target.
We now have three separate price targeting methods all drawing attention to the 0.069700-0.070792 range. How likely is the target to be reached? Well, there’s a long way to go still. 100% to go, in fact. However, this is a very bullish setup in price. I will be watching with great anticipation how the next few days of price action unfold. One thing which can be said is that with the confluence of price barriers around the target, if it is met, the stock is very likely to encounter some degree of resistance there.