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Identifying ending diagonals can be very helpful to gain insight into potential market reversals, allowing traders to prepare for a highly probable market move.
Ending diagonals often mark important market turning points, providing traders with an opportunity to exit a position, setup a new entry, or avoid taking unnecessary risks.
This pattern is characterized by a series of progressively lower highs and higher lows, forming a wedge slopes in the direction of the trend. This pattern is the end of an impulsive (wave 5) or corrective (wave C) movement. It is considered a reliable reversal signal, as it represents a loss of momentum in the direction of the trend and a potential change in direction.
I´ll use Bitcoin´s recent price action that is a textbook example of an ending diagonal. Let´s drill into all the details.
1. End of a wave sequence
My Elliott Wave count on Bitcoin’s 4-hour chart from February 2nd, 2023, suggests a clear impulsive wave sequence and that the upward trend could be reaching its conclusion in light blue wave 5.
2. Formation of a wedge
Ideally, the series of higher highs and lows would form a wedge pattern. In this case, and expanding wedge, with the trendlines shown in green in the following image. Note that the wedge follows the direction of the trend. This is an important aspect that differentiates this pattern from bull flags, for example.
3. Wave Structure
The ending diagonal pattern consists of five sub-waves. Each corrective sub-wave overlaps the previous waves, and all waves follow A-B-C patterns.
This gets very clear by zooming in on the 1HR chart. The 5 sub-waves that form the wedge are shown in blue, and the red A-B-Cs indicate how each sub-wave was formed.
4. RSI Divergence must be present
After the conclusion of light blue waves 3-4, all highs presented RSI divergence (lower lows on RSI, with higher highs on price).
RSI Divergence is also a strong indicator that a trend is losing its steam, and its presence in the ending diagonal is a solid supportive argument.
My targets for a reversal vary a lot based on previous price action, Fibonacci extensions and other elements. But here are some that you can work with:
- Base of wedge pattern – blue level
- Next support/resistance level – orange level
- Previous wave 4 – red level
- 50% pullback – coincides with red level
If you are not using ending diagonals in your technical analysis toolset, I strongly recommend you learn how to identify and trade this pattern. It has good statistical results, and has definitely contributed to my trading edge.
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