(Click On Charts To Enlarge)
Friday's "Crash" opening put me in mind of the SKF (Ultrashort Financials) 25% Crash Opening on September 19 (see Chart #1), the morning after the ban on shorting financials was announced. "You had to be crazy" to be long a fund that was ULTRA short the financials when no one was alowed to short them, but the Crash in the SKF was over at the open and the fund began its 135% rally to the Bullish Wolfe Wave target that got MADE one day after the ban was lifted. Go figger, huh, but that September 19 open sure put a lot of folks wrong-footed! UGH...
On Friday morning, just about everything had a big gap down, but not as much as was expected. The show was over for the day right at the open, as far as any crash on Friday was concerned. Any further crashing next week remains to be seen. I try to keep my opinion out of the equation, and see if I can make anything of the charts ;)
Chart #2 is the SDS (Ultrashort S&P 500). Chart #3 is the SSO (Ultra S&P 500). Both funds attempt to roughly double the performance of the S&P 500 on the downside (SDS) or the upside (SSO). These are 10-Minute charts, so they don't have the significance of a daily, weekly, or monthly chart, but they often can give us clues about short-term moves.
On Friday's "crash" opening, the SDS made an upside Wave 5 fakeout move above the Bearish Wolfe Wave pattern, and the SSO made a downside Wave 5 fakeout move below its Bullish Wolfe Wave. A Wave 5 "fakeout breakout," or "fakeout breakdown" is the hallmark of a Wolfe Wave. It puts the proverbial "everyone" wrong-footed if they play the breakout or breakdown. Initial confirmation of the fakeout is when price comes back inside the pattern. Stop loss: the high of Wave 5 (or low of Wave 5 in a Bullish Wolfe Wave).
Additional confirmation can be if any other patterns form when price gets back inside the Wolfe Wave. In the SDS, for example, we've got a Bear Flag (pattern in yellow) that broke down and was being retested at the close on Friday (yellow arrow). Final confirmation in the SDS would be a break of the bottom of the pattern. In this particular case, we've had TWO trendline validations (white arrows) of the bottom of the Wolfe Wave (Waves 2 and Waves 4). That suggests that the market strongly supported the SDS any time that it was tested, and further suggests that it "should be" meaningful on the downside if it gets broken. There's no "ALWAYS" in the stock market, which is why we use stops. If the pattern gets broken, I'd stop it out above Friday's late afternoon high of 108.45, or above whatever nominal high is made early Monday, prior to any breakdown. On a breakdown, the target line is at #6, roughly the low 90's in the SDS.
Interestingly, in Chart #4, the daily SDS, there is a gap at 92.08-92.85, right in the area of the Wave 6 target line in the 10-Minute chart. Gaps don't "have to" get filled, and sometimes they get filled much later in time, but a pullback to that gap, which also is roughly where the up trendline of the Symmetrical Triangle comes in, would fit nicely. Almost too-oo nicely. LOL.
If the Bearish Wolfe Wave in the SDS does breakdown, that gap/trendline area "should be" support. In this daily chart, the SDS has had a Bullish Symmetrical Triangle breakout, which looks to be a larger fractal (repeating pattern) of the little Symmetrical Triangle that broke out September 29, so the SDS is bullish basis the daily chart (bearish for the S&P 500).
6 comments:
Hi Melf Elf,
Thanks for your comment about the discussion angus and I had over on xtrends. And thanks for posting the link to your blog. It's a good one, one that I will add to my reading list.
I have not heard of Wolf Waves. Is this a concept you have developed? Where can I find out more about them?
I read your discussion and without knowing the details of how Wolf Waves work, I came to the conclusion that you are bearish the stock indexes at this time. Did I read you correctly?
Greg
(I have not heard of Wolf Waves. Is this a concept you have developed? Where can I find out more about them?)
Good Morning, Greg,
A fellow named Calven at 3StocksOnFire.com introduced me to Wolfe Waves a couple of years ago. They can be very helpful in identifying reversals, the most stunning examples of which, in my experience, were the back-to-back Bullish Wolfe Waves in the SKF (Ultrashort Financials) beginning last spring through this autumn. I posted those charts in my October 19 blog entry if you care to take a look at them.
Here's a link for more information on Wolfe Waves:
http://chart.nu/wolfewave.htm
(I came to the conclusion that you are bearish the stock indexes at this time. Did I read you correctly?)
Yes, you did. If you look at chart #4 of the daily SDS (UltraShort S&P 500) that I posted yesterday, it had bullish breakouts of Symmetrical Triangles (so, bearish for the S&P 500 since it's an inverse fund) on September 29, and again on October 22.
Going into the close on October 21, prior to the second (October 22) breakout in the SDS, is when we broke below the bottom of the Ascending Triangle, the top of which had Triple Resistance at 985 (see my recent blog entries: SPX: 985 Triple Resistance). We broke below two more patterns after that, so it's been plenty bearish. UGH.
However, we want to be looking the other way at all times, to see if there is anything short-term bullish developing, and there is in the 10-Minute charts of the SDS and the SSO (charts #2 and #3 posted yesteday).
"If" the SDS breaks down below the bottom of the Wolfe Wave, and "if" the SSO breaks out above its Wolfe Wave, we could have a surprise rally early this week.
Let's look at the 10-Minute Chart of the SDS again (Chart #2 that I posted yesterday) and see what we know so far:
1. We know that we all were hunkered down for a Crash at Friday's open, locked limit down in the futures. CNBC gave us the limits where trading halts would be imposed, analysts were telling us that we needed a huge move down for capitualtion, etc. What did we actually get?
2. We got no crash, and we got an open that was at/near the low of the day, which "so far" is expressed in the charts of the SDS and the SSO as Wolfe Wave 5 fakeouts.
Everyone who sold or sold short the open in anticipation of a Crash didn't get rewarded. They might get rewarded later on, but we're looking at what we know right now, as of Friday's close.
3. We know that after we came back inside the Wolfe Wave (we're using the SDS...Chart #2), we formed a Bear Flag (patten in yellow) in the 10-Minute chart, and we know that it broke down (bullish for the S&P 500 at that point).
4. We know that after the Bear Flag broke down, the SDS found support TWICE (white arrows) at the bottom of the Wolfe Wave (bearish for the S&P 500 at that point).
5. On the TWO retests of the bottom of the Wolfe Wave, we know that the first attempt to get back above the Bear Flag failed (bullish for the S&P 500) and we know that coming off the second test of the bottom of the Wolfe Wave (white arrows), we closed on a "dumb note," right at the bottom of the Bear Flag (dead neutral for the S%P 500...we don't know the outcome of that second retest yet).
Summary: "If" the S&P 500 heads lower at the open on Monday, the SDS will go higher and we still will be within the Wolfe Wave pattern, so that won't tell us anything as far as how much lower the S&P is going basis this particular pattern, but we know that the daily chart of the SDS still is bullish (bearish for the S&P 500).
However, "if" the S&P heads higher at the open on Monday and "if" we break below the bottom of this Wolfe Wolfe which has been TWICE validated (the two white arrows), we very likely are headed toward the target line, at #6, short-term.
Sorry that this got so long, but I try to follow the market because I'm LOUSY at predicting anything, and what I've outlined is the type of thing that I look at.
My M.O. is "YOU tell me what you want to do, Ms. Market, and I'll try to follow you as best I can."
In my particular case, "technical analyst" really is a euphemism for "ORDER TAKER." Not a very glamorous title, admittedly, but Ms. Market has kicked my behind enough to make me ver-r-ry humble ;)
Best of luck to you with your trading, Greg!
melf elf,
Thank you for your analysis. I thought in Wolfe Waves that the trendlines from #1 to #3, and from #2 to #4, have to converge at some point in the future to estimate a time-to-arrival for the target?
That's what I read from the articles on Wolfe Waves.
Is this not necessarily true in your experience?
Lawrence,
No, that isn't necessarily true, in my experience. In fact, I don't remember ever seeing one that worked out perfectly in terms of price and time, at target line (Wave 6).
The Wolfe Wave trendlines generally do converge at some point (although sometimes they're almost parallel), but I don't find that the convergence of the trendlines in time is very useful for estimating when the target gets MADE (if it gets MADE at all...they don't always play out).
Look at the two Wolfe Waves on the SKF that I posted on October 19, as examples. Those targets got MADE long, long before the Wolfe Wave trendlines converged.
Good luck!
Hi Melf,
Thanks for the link re wolf waves. To my untrained eye, it sure looks like the s&p had a bullish 5 wave wolf count and should now be going UP, not down.
You can see this count on charts with 30 minute intervals or less. Easiest to see on the 5 or 10 min charts.
Wavecount would be:
1 - 875.81 late Wednesday
2 - 922.83 Thursday morning
3 - 858.44 Thursday afternoon
4 - 910.49 Thursday just before close
5 - 853.44 Friday morning
The rest of the day Friday's action was above Friday morning's low. If tomorrow's price action goes above 910, won't that confirm the bullish wolf wave described above?
What am I missing here and why is this wave count not a valid wolf interpretation?
Thanks!
Greg
(What am I missing here and why is this wave count not a valid wolf interpretation?)
Greg,
You're not missing a thing, and very nice job!
We'll just have to see if it breaks out and heads to the target line, #6. These don't always work out (what does?), but when they do, they're usually nice, sharp moves to correct how overdone things got at Wave 5.
On your S&P Wolfe Wave that you described, notice that Wave 5 ISN'T a fakeout to the downside. The 853.44 Friday morning low held just about smack on the Wave 1-3 trendline. That's a slight defect. It would have been better to bust that trendline to the downside to get more people wrong-footed, but it still might work out. The SSO did go below its Wave 1-3 trendline, seen on chart #2 that I posted Saturday.
(If tomorrow's price action goes above 910, won't that confirm the bullish wolf wave described above?)
The breakout would be lower than that. Basis the 10-Minute Chart in the SPX cash that you used, Friday afternoon's 3:00PM high of 896.30, and 3:50PM high of 893.62 both were just about right on the Wave 2-4 trendline (both were failures at trendline resistance) so a technical breakout would be something slightly below 893.62 since the trendline has a downward slope. We obviously would want to see those two highs get taken out to the upside.
All of that said, we'll probably go into the crapper at the open ;)
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