The Wedge Drop is the first time the market trades back down below the moving averages after an Exhaustion Extension. Oliver Kell uses the Wedge Drop as confirmation that the uptrend has concluded.
After an Exhaustion Extension, the price will trade in a tight range as the moving averages catch up and begin to flatten. When the price drops below the moving averages, it serves as confirmation that the stock has topped or needs time to re-base, and is time to exit the position.
Depending on the overall market environment and the individual characteristics of each stock, this “top” may just be an intermediate-term trend change and the stock will develop another base as it progresses through the Cycle Of Price. In more severe circumstances this will confirm a longer-term top.
After a Wedge Drop, the moving averages will act as resistance, guiding the stock lower. When you see this type of action, exit the position and let the cycle unfold.
