(Click On Chart To Enlarge)
The Key Elements of a Wolfe Wave are:
1. A strong directional move (the Lead-In), to Wave 1.
2. Four Waves (including the Wave 1 high) that form IN THE DIRECTION OF THE TREND.
3. A Wave 5 Fakeout/Breakout that puts players wrong-footed. Longs buy and shorts cover at exactly the wrong time, at the fakeout.
4. A sharp move down from the Wave 5 fakeout to the target line, at Wave 6. (The target line is formed by connecting the high of Wave 1 and the low of Wave 4).
Notice that Wave 4 also was the third "hit" to the bottom of the channel. That hit validated the bottom of the channel as support. When a validated trendline gets broken, it usually has some significance. The channel got violated at about SPX 979 cash and the move down to the target line was very sharp, consistent with a Wolfe Wave.
Also of note: after the Wave 5 breakout/fakeout, the SPX sold off then made another bid for the top of the channel which, on that rally, proved to be resistance. The SPX made a nominal new high on that second move, at 1007.51, vs. the Wave 5 breakout/fakeout high of 1006.03. That second move to a "higher high" also contributed to putting players wrong-footed.
5 comments:
Thanks for the chart Melf. I've looked at some other web pages with Wolfe wave descriptions, but I think you explained it better. I'll be watching for them from now on.
nice blog MELF,
congrats
gluon and lv,
Thanks, guys! Glad if that explanation helped.
We also got the move back down to the bottom of the Wolfe Wave (SPX 922) and almost got the full measured move to SPX 893 (the height of the pattern, subtracted from the breakdown.
melf
good analysis
what would be the trend following this pattern based upon your analysis?
almost44,
The pattern isn't predictive beyond the Wolfe Wave target (#6 on the chart), but often price continues down to the bottom of the channel (SPX 922) at Wave 1, just as it would in a Bear Flag or a Bearish Rising Wedge, and then down toward the measured move target, at roughly SPX 894 if the SPX 922 area isn't support. It wasn't and we got down to SPX 899 yesterday, which is fairly close. These targets are by no means exact, but rather, "what we're aiming for." The target of 119.17 in the USO getting hit to the exact penny in an earlier blog entry was very unusual. We can't expect that kind of exactitude.
To calculate the measured moved target in this SPX breakdown, take the height of the pattern (1007 - 922 = 85 points), then subtract that from where the bottom of the channel was broken, at roughly SPX 979.
979 - 85 points = Target: SPX 894
Good luck!
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