UYG: Possible Bearish Wolfe Wave

(Click On Charts To Enlarge)

WOLFE WAVES:

Step 1: THE LEAD-IN Start at an important high or low basis whatever time-frame you're using. There should be an obvious, sustained directional move during the Lead-in. There will be down days, but overall, a sustained directional move. When that strong move ends, that's Wave 1.

Step 2: The following Waves 2-5 have to be in the direction of the Lead-in. If the Lead-in was a rally, the next Waves have to be "HIGHER highs" and "HIGHER lows," like a Bear Flag, or a Bearish Rising Wedge. If the Lead-in was a selloff, the next Waves have to be "LOWER highs and LOWER lows."

Step 3. After Waves 1-4 are established, we're look for a WAVE 5 FAKEOUT of the pattern that puts everyone "wrong-footed," on the wrong side of the trade. In a Bearish Wolfe Wave, like these two example, The Bulls buy the breakout at Wave 5, and The Bears "Buy To Cover" the breakout at Wave 5, and it's exactly the wrong thing for everyone to do. As a result, the selloff is often sharp and swift.

Step 4. To determine the target line for Wave 6, connect the HIGH of Wave 1 to the LOW of Wave 4. If it's a valid Wolfe Wave, the target will get MADE, or pretty close to it.

Additional Comments: Wolfe Waves can look like Bear Flags/Bear Channels (parallel lines) in Chart #2, or like Bearish Rising Wedges, as in Chart #1. Also, it's nice if there is some symmetry between the waves, e.g. if the moves down from Wave 1-2 and from Wave 3-4 are equal in time, or have some Fibonacci relationship. Also look for symmetry between the two highs and the two lows (Waves 1-4)

In the first chart above, UYG "might have" just put in the Wave 5 upside fakeout on the opening "Gap To Crap" this morning. If this morning's high gets taken out to the upside, the pattern isn't valid. It might make a slightly "higher high," then fail, but personally, I'd cover a short position if this morning's high got taken out to the upside.

Also of note: the pattern (in blue) from Wave 3 down to Wave 4 is a Bull Flag/Bull Channel continuation pattern. That breakout put roughly 36.52 IN PLAY. That got MADE at the opening "Gap To Crap."

Chart #2 is a Bearish Wolfe Wave in NDAQ, in late 2006. We can see that after the Wave 5 fakeout, the selloff was fairly swift and sharp, and the target got MADE with no problem.