From the June 01, 2010 issue of Futures Magazine • Subscribe!

Opportunities in E-mini wedge price action

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If you instead focus on three pushes and not the converging trend line and trend channel line, you will discover that there are far more patterns that behave like wedges but often do not have a wedge shape. “Where there’s a wedge...” (below) shows 10 of them, but there are others in there as well. Bars 1, 3, and 6 are three pushes down, and if you view the Bar 4 high as a false breakout above the trend line and therefore ignore it, you can see a rough convergence of the price action. Traders could place a buy stop at one tick above the Bar 6 low and if filled, a protective stop below the Bar 6 low of the wedge, looking for a test of the Bar 2 top of the wedge.

Click chart to enlarge

Chart

Bars 2, 4, and 8 were also three pushes up and therefore met one of the criteria of a wedge, and should be expected to behave similarly as well. In addition, they were part of an expanding triangle (Bars 1, 2, 3, 4, and 6), which often leads to a reversal. Bars 5, 7, and 8 were also three pushes up. Placing a sell stop to go short at one tick below the Bar 9 bear inside bar is especially good because both patterns share the same signal bar, and this increases the chances that the market will test the low of the pattern (Bar 6 is the low of both the expanding triangle and the wedge).

An expanding triangle in one direction is frequently followed by an expanding triangle in the other direction, as was the case here. Because traders have been fading (taking a trade in the opposite direction) every new swing high and swing low, it is a good bet that this behavior will continue, even though at some point it will stop.

The Bar 11 bull inside bar was the signal bar for the long based on the expanding triangle bottom. It was also the signal bar for the three pushes down from the Bar 8 high. Bar 9 was a down bar and was the first push. It was then followed by a small bull bar and then a second push down to the Bar 10 low. The market then went sideways and broke out in a third push down to the bar just before Bar 11 and it broke below a trend channel line. Bulls would place a buy stop at one tick above Bar 11 and a protective sell stop either below the low of the bar or one tick lower, below the low of the expanding triangle. Bars 12 and 14 were two failed attempts to push the market down and both held above the protective stop.

Bars 13, 15, and 16 were three pushes up and Bar 16 broke above the trend channel line but closed back below it. Why was shorting at one tick below the Bar 16 low not a great short? Because the momentum up was too strong. There was only one bear body in the prior 6 bars and it only had a one tick body, which means that the bears were not strong. Also, the move up was in a tight channel. It is sometimes easier to spot tight channels if you just look at the bodies and ignore the tails. The little trend line below those bodies makes it easier to see the channel. When the market finally breaks out of a tight channel like this, there is usually a test of the channel’s high, and that also makes shorting below the Bar 16 low less likely to be profitable. Finally, after the market made two attempts to sell off to a new low at Bars 12 and 14 and instead broke out to the upside, traders were expecting at least two pushes up, which usually happens after a breakout.

Bars 17, 18, and 20 were three small pushes down and created a wedge bull flag at the moving average and traders would be looking for a test of the Bar 16 high. The Bars 18 and 20 double bottom was followed by a small bull inside bar, which is a pause. A pause is a type of a pullback and a double bottom pullback is a reliable long setup. Traders would place an order to go long at one tick above the bull inside bar and a protective stop at one tick below the low of the double bottom.

Bars 22, 24, and 26 created another common variation of a wedge bull flag where the first push down occurs before the end of the move up.

Bars 25, 27, and 28 (or Bars 27, 28, and 30) formed three pushes up but again there was too much upward momentum and a tight bull channel so the market was more likely to continue up or at least go sideways than it was to sell off.

Bars 29, 31, and 32 were three pushes down in a sideways pattern just above the moving average following a six-bar rally where every bar had an up close. This is a possible bull flag. The Bars 29 and 31 double bottom were followed by the Bar 32 bull inside bar and therefore created another small double-bottom pullback long setup.

Although a traditional wedge pattern with three clearly defined pushes and a converging trend line and trend channel line often leads to a large swing, traders also should carefully look for small three push patterns throughout the day because they often provide excellent scalping opportunities, as shown here.

Al Brooks, MD, is the author of “Reading Price Charts Bar by Bar: The Technical Analysis of Price Action for the Serious Trader” (Wiley, 2009) and provides live intraday E-mini price action analysis and free end of day analysis on www.brookspriceaction.com.

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About the Author
Al Brooks

Al Brooks, M.D., is author of the Brooks Trading Course (27 hours of videos at BrooksTradingCourse.com), several books on Price action (Reading Price Charts Bar by Bar: The Technical Analysis of Price Action for the Serious Trader, Wiley, 2009, and the 500,000 word, three-book series, Trading Price Action, Wiley, 2012), and numerous articles in Futures Magazine. He also provides live intraday E-mini price action analysis and free end-of-day analysis on www.brookspriceaction.com.

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