Tuesday, April 21, 2009

Wedge Breakout

The title says it all, not much more detail to describe here. As I had posted in the early morning hours we had some clear signs to look for.

"an open below 853-854 will lead to more sell offs today"

We opened right at that range and sold off immediately. After the drop in the first hour we remained in a very narrow channel for the entire day and continued selling off. I attempted 3 long positions to try to get in on a retracement and stopped out on every attempt as we never made it out of the channel.

As we hit the previous low point of the wedge we have to assume some retracement today. I had mentioned in the comments that wedge breakouts are difficult to trade. I mean you could have gone short anytime during the day yesterday to make money, into an oversold condition. Difficult to risk it there.

For today I would assume the best case scenario for a retracement would be the 843-844 range. If we end up breaking this range we can get all the way towards 856 and possibly higher to retest the lower trend line of the wedge. However it is my anticipation that any retracement will be very short lived. While we held the range yesterday our close was very bearish, right below the previous wedge bottom. We have to account for slight violations during intra day ranges but a close this low is quite bearish. This leads me to believe that we may have another push down today towards the 820 range and possibly lower.

So as a result let me just give you some of the lower level support range and indicate the strength each one of them have.

826-828 strong support
822 medium strength
814 very strong support - a break of this range will bring us back to the 790 range very fast

As mentioned again, wedge breakouts are very difficult to trade and they are over very fast, by the time you see it, most of the range may have already occured before a larger retracement is in play. Unless you have an existing position that works in your favor its difficult to try to get a piece of it. Its actually better to stay out until you get a sizable retracement of at least 15 points - as we saw yesterday every attempt of the market to create a rally failed.


  1. tried trading futures for a retracement as a hedge for my big short. Even those are taken out very fast. Normally futures market adhere to rules quite a bit more. Not even able to get 10 points in overnight action.

    Which leads me to believe that we may not see much of a retracement until we have completed the first cycle of the wedge breakout. We should find a bottom today that is tradeable from the long side but it seems we need to get a bit lower first before that can occur.

    It is very possible that we may see a high 81X in play today, possibly all the way to 814 before we see a sizable bounce. Of course we have some small retracements in between but they should all be below 10 points in size.

  2. again, the first 15 minutes will guide us in terms of direction today. Wait for that before we make any trade decisions. For now I am going in only with one trade at the 814 for a larger bounce.

  3. Chris,
    Could you please explain in a little more detail what the "the first cycle of the wedge breakout" from your first comment means?

    How many cycles are there? Is a breakout followed by small retracment considered a cycle?

  4. like many other things I am looking at 3 moves for a wedge breakout to be confirmed.

    The first move of a wedge breakout is normally just one direction without any retracements. We did not find any support yesterday during this strong down move, closed at the low of the day (which indicates continuation). Not having seen any rally leads me to believe that this first move is not yet over.

    What normally follows after the first strong down move is a retracement of around 23% in size. At this point a 23% retracement is around 12 points. After this first retracement the next step can vary by either continuing with indecision (check 5 min bars) to the next FIB level or follow up with another down move that is usually 61% of the size of the first move.

    So 100% down move, 23% retracement (here is where it gets interesting and we can continue higher to retest the breakout range trend line), then followed by another 61% move of the first cycle. In my trade style, this would be the final confirmation that a wedge pattern is breaking out and we will go lower to the final retracement point (in this case 741-780 range) of the entire pattern off the 666 lows.

    I will try to post a pic this afternoon so you can see the different cycles a bit easier (I am a picture person so explaining it may sound confusing).

  5. Thanks for the explanation. It was very clear, but a picture wouldn't hurt :-)