Post feedThe Mysterious Falling Wedge Pattern
I received a few e-mails about having CME in my list as a falling wedge. As always not every trader out there has heard of the pattern, understands it fully, or has ever seen a confirmed one in existence. That's what I am here for.
Funny, but my wife just walked by and asked me what I was writing about and I asked her if she'd like to contribute to this post on falling wedges. She said "Falling Wedges? Look Out!" This is a common misconception (don't make fun of her, even though she's a washed up stock broker!).
Here is a chart of CME that will show the pattern highlighted and show the formation within my support and resistance lines. Since blogger is not uploading photos this morning...
Looks like a falling wedge now, right? As you can see it is triangular in shape, but both support and resistance are sloping downward albeit not at the same angle. Resistance will have a steeper angle than support.
Where the confusion lies is that this pattern is a Bullish Continuation Pattern. When I mentioned that it confirmed yesterday that is because it broke resistance with fairly active volume. Once it does this it confirms the pattern and now the stock will be working towards its price target. As with any pattern, measure the width of the triangle (535-555) and CME has a price target of $20 which should put the stock at a minimum of $555. To determine how long it will take to get there measure the duration of the pattern. Looks to be about 2 weeks long, so I would expect CME to reach $555 within two weeks. Keep in mind it won't get there in a straight line, and don't send me an e-mail on a down day asking if it has failed. With all patterns we have discussed, failure is achieved when the stock breaks below it's breakout point ($535).
With wedge formations, falling or rising wedges, remember that they will rise or fall against the trend and they are continuation patterns. Here we saw an example of a falling wedge...a rising wedge would appear within the context of a downtrending stock. When confirmed, the downward trend would continue.
Hope this post was able to clarify and provide a better insight to this pattern.
Funny, but my wife just walked by and asked me what I was writing about and I asked her if she'd like to contribute to this post on falling wedges. She said "Falling Wedges? Look Out!" This is a common misconception (don't make fun of her, even though she's a washed up stock broker!).
Here is a chart of CME that will show the pattern highlighted and show the formation within my support and resistance lines. Since blogger is not uploading photos this morning...
Looks like a falling wedge now, right? As you can see it is triangular in shape, but both support and resistance are sloping downward albeit not at the same angle. Resistance will have a steeper angle than support.
Where the confusion lies is that this pattern is a Bullish Continuation Pattern. When I mentioned that it confirmed yesterday that is because it broke resistance with fairly active volume. Once it does this it confirms the pattern and now the stock will be working towards its price target. As with any pattern, measure the width of the triangle (535-555) and CME has a price target of $20 which should put the stock at a minimum of $555. To determine how long it will take to get there measure the duration of the pattern. Looks to be about 2 weeks long, so I would expect CME to reach $555 within two weeks. Keep in mind it won't get there in a straight line, and don't send me an e-mail on a down day asking if it has failed. With all patterns we have discussed, failure is achieved when the stock breaks below it's breakout point ($535).
With wedge formations, falling or rising wedges, remember that they will rise or fall against the trend and they are continuation patterns. Here we saw an example of a falling wedge...a rising wedge would appear within the context of a downtrending stock. When confirmed, the downward trend would continue.
Hope this post was able to clarify and provide a better insight to this pattern.
Great Post and visuals Jeff!
It helped clear up a 'murky' area!
Lina
Posted by
Anonymous |
12/06/2006 10:59:00 AM
DE - It seems nice Bullish Flag borke with nice volume
Posted by
Unknown |
12/06/2006 12:50:00 PM
Jeff,
Could this also be looked at as a flag or pennant with the pole starting at about 500? If so, that would increase the price target by 30 pts to 585 which doesn't seem entirely unrealistic. Or is this too optimistic of a target?
Thanks,
CAthy
Posted by
Anonymous |
12/06/2006 01:04:00 PM
Cathy,
Which one? Flag or pennant? The pennant would be more symmetrical, the flag in my opinion would be more definitive. However, if you do see something different this is quite alright. Trade it as such!
Nice work!
Posted by
Option Addict |
12/06/2006 01:11:00 PM
Thought I would share two plays I entered today..
NSM - Symetrical Triangle breakout on about avg volume with price target of 27.50 risked around .50 to make 2.50 , Entered a Feb 20 call.
TTI - Symmetrical Triangle breakout a few days back but risk:reward still is decent. Risk of about 1.25 to make $5.00 with a price target of 32. Entered a Mar 25 call.
I realize I'm probably overly conservative on the time frame, could realistically shorten up the expiration dates by 1 month on both trades.
Cathy
Posted by
Anonymous |
12/06/2006 01:20:00 PM
Jeff,
I was actually thinking of it more as a pennant due to the shape, with the support and resistance lines being unparallel. I suppose the target would be the same either way. Thanks as always for all your hard work. Your blog has become part of my daily routine and sanity check as well.
Cathy
Posted by
Anonymous |
12/06/2006 01:23:00 PM
Jeff,
If you happen to check this before market closes...PCAR, I have a long call and see the bearish engulf has formed on good volume. Am curious if this would be reason enough for you to exit, or would you still give it down to the $65 support line?
Thanks,
Cathy
Posted by
Anonymous |
12/06/2006 01:33:00 PM
Jeff,
Thanks for the insight.
Posted by
Anonymous |
12/06/2006 02:15:00 PM
Nag,
it was a nice, clean flag break on huge volume and it gave everyone who missed the ascending triangle break a chance to get back in.
Posted by
Brett |
12/06/2006 02:28:00 PM
clear now thanks.
Daniel DR
Posted by
Anonymous |
12/06/2006 02:37:00 PM
Speaking of falling wedges, would you say that NYX looks like one and we are just waiting for confirmation?
Amelia
Posted by
Anonymous |
12/06/2006 07:42:00 PM
Oh WEDGES!!! I thought you said wedgies and I've never had one that fell before. Thanks for clearing that up. CME has been on the radar screens for a while now. Nice to see it should be heading up again.
Yet another educational day. Thanks Jeff.
Chris.
Posted by
Anonymous |
12/06/2006 08:25:00 PM
Jeff,
The calls on CME are VERY expensive right now. $23.05 for a 540 Jan call. Even OTM... the $550 calls are $18.20 and the stock has to go up $8.55 before it's in the money. Do these big numbers not scare you away from this trade? They do me. Give me a nice 0.50 time cost and I'm a happy camper. I know sometimes you need to spend a lot to get into an expensive stock (I paid a hefty premium to get into GOOG and got out before it tanked... although JUST in time) but this seems a bit extreme. What do you think?
Chris.
Posted by
Anonymous |
12/06/2006 08:44:00 PM
Chris,
I have trade CME before and even if the calls are very expensive it coulb be really rewarding since the stock could move a lot in 1 day. This one is a good candidate for day trading.
Another option would be to do spread. The bull put spread jan 490/480 give you a 0.55 credit.
Janine
Posted by
Anonymous |
12/07/2006 12:19:00 PM