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Technical Update: Wells Fargo

Tension has been building up in Wells Fargo over the last 9 months or so. A bearish consolidation has been developing in the form of a descending triangle, shown in the daily chart in figure 1.

Figure 1

The triangle is in the latter stages of formation meaning a breakout is becoming increasingly imminent. A descending triangle is an intrinsically bearish pattern which, in isolation, suggests a breakout to the downside is more likely than to the upside. However, considering the extrinsic sentiment in this chart provides another perspective. Figure 2 shows the weekly version of this chart for a longer-term view.

Figure 2

Zooming out reveals that the descending triangle is forming right on a strong prior support area marked by the green horizontal line. The bullishness around this area of support challenges the bearishness of the descending triangle pattern. The green level of support carries more weight because it coincides with the level where the two downward swings in this move are of equal length, shown in figure 3.

Figure 3

The first grey box is used to measure the distance from point X to point Y. The second grey box is an exact copy of the first but moved so that it projects the distance XY downwards from the start of that move at Z. The resulting level is equal to the prior support on the green line.

This means we have a bearish pattern occurring at a relatively strong support level. If support is strong enough, price will reverse upwards regardless of the descending triangle. If, however, price breaks through support around $43, you can expect there to be a strong continuation of the bearish move with a lot of momentum behind it. The green line marks a significant psychological level for market participants. Watch the price behaviour around that level, and the upper bound of the descending triangle over the coming weeks.

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