Saturday, February 19, 2011

Dances with ' Wolfes '

We had a discussion on'Gaps' the other day in the comment section of a past post.
Recently I was watching the 1990 classic , 'Dances with Wolves' (starring Kevin Costner), It struck me to check out the 'Wolfe Waves' as the Daily chart flashed in front of me. Let's check it out .

What are Wolfe Waves -
 (As per Investopedia)

In technical analysis, it is a naturally occurring trading pattern present in all financial markets. The pattern is composed of five waves showing supply and demand and a fight towards an equilibrium price. These patterns can develop over short- and long-term time frames such as minutes or weeks and are used to predict where a price is heading and when it will get there.
If identified correctly, Wolfe waves can be used to accurately predict the scope (equilibrium price) of the underlying security. To identify Wolfe waves, they must have the following characteristics:
  • Waves 3-4 must stay within the channel created by 1-2
  • Wave 1-2 equals waves 3-4 (shows symmetry)
  • Wave 4 is within the channel created by waves 1-2
  • There is regular time between all waves
  • Wave 5 exceeds trendline created by waves 1 and 3 and is the entry point 
  • The estimated price is a price along the trendline created by waves 1 and 4 (point 6).

The Gap created in May 2009 can be filled , If this Wolfe Wave Projection holds good.Though I have read that they have a very high percentage of results, I personally have never traded them. This is also a Long Term Projection of which I have no other TA support now and also I am not biased for it.This only seems to answer a question of the discussion on Gaps.

 Bears will be Happy ' Dancing with the Wolfes' !!!


RainMaker said...


Nice observation.

I think this one fails.

Leg 4-5 is too large in comparison to leg 2-3.

Also point 5 is Far off from the TL joining 1 and 3.


AAR VEE said...

Hi RainMaker

Lets see .Pl.Share any technicals ,like some ratios of price or time etc,that are common or allowed in this pattern. I didnot get any rules for it regarding distance of 5 or else.


vAsiSTha said...

I am not so sure Rainmaker. You got to see logarithmic scale charts for the longer term ones. That compresses the distance of wave 5 in this chart.

Chartists like Prechter recommend using log scale, they believe that longer term retracements are more accurate this way.

It would give it 70-30 chance, seeing that the channel is very near parallel.

AAR VEE said...

Thanks misnomer for commenting here.

U are right about using the longer term charts in log scale.I also should have done the same here.

Do share ur views regularly.U are doing a nice work on your blog.