Tuesday, September 22, 2009

Wedges that break the "wrong way"

Today I've got a few quick updated charts for you. They both display a relatively rare phenomena that seems to be happening more often lately or a rising (or falling) wedge that breaks upwards (or downwards), in other words, in the "wrong" direction. Traders expect rising wedges to break down and falling wedges to break up, but clearly that's not always the case.

According to Bulkowski, rising wedges break down 69% of the time and meet the price target ~50% of the time. So in the S&P chart below, we have the statistically unlikely upwards breakout occurring recently which targets roughly 1250 (coinciding with my head and shoulders target). For such an over extended market that target seems a little crazy but that's what the chart says. On the other hand, if this wedge does eventually break down, the target would be about 850 (including the 50% statistic). As you know, I think that if the S&P 500 slips below 950 then we will have a resumption of the bear market. So in my view this is really a crucial pattern here, and currently its breaking upwards suggesting that this is a cyclical bull market. And bull markets... well, they go up, and up and up.

Another wedge that broke the "wrong" way recently is in UNG which broke down then basically crashed a few weeks ago. Bulkowski says that falling wedges like the one in UNG, break upwards 68% of the time and meet their price target 70% for upwards breaks and 30% for downwards. Interestingly, if you include that 30% statistic then UNG actually met the target on that downward break. After the gory capitulation in which natural gas traders "got slaughtered," UNG managed to return into the wedge where it now lies in conolisdation. I call it consolidation because UNG has traded in a narrow range as volume has declined after a huge move up. Now that we are back in the wedge we must expect the wedge to break upwards again, as this happens 68% of the time. Further, the recent reversal of the downwards break gives support to the notion that any attempt to break UNG down will bring in demand. Note that confirmation occurs when the price closes outside of the pattern.

I'll just conclude with one caveat that Bulkowski mentions to these patterns, the dip:

"After a downward breakout (of a falling wedge), price sometimes curls around the front of the wedge and soars upward. The busted pattern presents a profit opportunity from the long side."

Disclosure: I remain long UNG calls

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