Monday, March 16, 2009

Wedge Breakout - what next?

Ok as I am leaving tonight I wanted to give a quick update for today and the days to come. First off today represented the first breakout of the wedge we had been building up now for 1+ week. You can see the strong 60 min breakout bars. We topped out as expected right between my target price range (770-779) with a top right in the middle at 774.50. This is the same range I was hinting at last week after we had broken then 741.

While I am happy that my calls are working out here I am still steaming from thursday last week - I know that you cannot win them all and its normal to be off every once in a while but I was totally unprepared. Normally I go into a trade day or trade range with many scenarios, this time I only had one and my reaction towards an unforeseen scenario lacked dicipline and precision - I think I am more upset at that then being off for one day. Unfortunately this off day has also cost me a lot of money, again something that adds to the frustration. Ok enough of the rant here, it happens and there is a saying - if it does not kill you it only makes you stronger.

Now from here on out we actually have 3 scenarios, each with quite a few implications. The bears had been caught in a bear trap all last week and now the bulls are on the edge of possibly ending up with that same fate. From a technical side I had advised that whenever a strong bearish rising wedge is created the breakout occurs fast and strong with at least 50% retracement. Now it seems we have found our top and broke below the wedge trendlines.

Scenario 1 - fake wedge and contination
This is a very unlikly scenario meaning that we would continue on the upside without a major retracement and a final stopping point in the 795-805 range. Again this is very unlikly to occur but would be inline with major bottoming pattners. While the retracement is to be expected it should be small and cannot drop below the 751 range, if it does it must stop at 745 and reverse back above 751 in less then 2-3 hours. Time wise this should be occuring within 2 days max (preferrably less).

Scenario 2 - normal wedge retracement
This is the most likly scenario with us seeing quite a strong down move that must occur in 2 days brining us back to major support in the 731 range, possibly 724. By day 5 we should have reversed and made up most of the retracement range. If it does exceed 724 I will be posting more details when it occurs as I need to see it for myself to determine what is occuring.

If this is how our wedge completes the 666 represents a major mid term bottom and we are setting up for our high 700 and 800 ranges in the mid term.

Scenario 3 - fake wedge retracement
This is something that may seem very odd to many of you. If our retracements end up on the slow side, meaning that we would retrace towards the 50% targets but require at least 3 or more days we are in for a rough ride. If by Friday we are still below the 741 range it is very possible that our 666 was not the final mid term low. Keep in mind if this is to occur we should see a very fast and sharp decline after the 50% retracement has been broken.

So the next 2-3 days are important yet again as they will give us more precise clues. From where we are today we can make the following assumptions:

1. A major bottom has been formed at the 666 range giving us a minimum of 8 weeks on the upside
2. The major down trend requires a break of the 709-716 before we can assume that its resuming *
3. Retracement scenarios described above

* while a break above 741 gave us signs of short term uptrend, for us to resume on the downside we need to see a break of the 709-716 range. So be careful and do not be fooled by a break of 741 thinking we will continue to drop. It is important to understand those retracements and support/resistance numbers when comparing to long, mid and short term trends.


  1. Great road map there. Thanks for taking the time to put that together! Can't wait to see how it unfolds.

  2. Thank you very much, this is great!

  3. also pay attention to the 3 day head and shoulder here =)

  4. Nice. I didn't even see that as I was looking the wrong time frame.

  5. also keep in mind, the past few days when it seemed we had indecision or a weak trend for the first part of the trade day we had high volume and fast reversals or move to follow.

    With the 3 day head and shoulder, slow moves towards the upside in a narrow range, the chances of a reversal are quite high.

    Also keep in mind the first fake wedge contination scenario I had described, 751 bottom, possible break but only short term for 5-6 points max, then reverse and rally strong.

    Going to be an interesting day for us here today.

  6. I'm assuming your targets for the head and shoulders would be scenario 2?

  7. seeing a rally here is quite bullish on the short term, the day is not yet over and we have been fairly light on volume so there may be a reversal coming, however getting back close to the 770 range is a strong sign for continuation and a false wedge retracement here. If you review what I had described for scenario 1 you can see clearly that thus far we have been trading within that pattern.

    At this point both sides carry quite a bit of risk, up and down side as you can clearly see here. If we can break the wedge top (774.50) by tomorrow we are setting up for the 790-800 range before we see any further drops.

  8. I believe, you are rtight. Scenario 1 is unfolding. I will wait it out and catch the trend on down side, which can be very fast.

  9. Chaugner? Is that your first name? Do you visit other blogs out of curiosity, and if so which ones?

    You have some very valuable insights to share. Thanks again for all the effort you've put in to help us less experienced traders


  10. do you feel confident now if scenario one in play ?