As of 09/19/2019
  Indus: 27,095 -52.29 -0.2%  
  Trans: 10,504 -72.12 -0.7%  
  Utils: 860 +3.49 +0.4%  
  Nasdaq: 8,183 +5.49 +0.1%  
  S&P 500: 3,007 +0.06 +0.0%  
YTD
 +16.1%  
 +14.5%  
 +20.6%  
 +23.3%  
 +19.9%  
  Targets    Overview: 09/12/2019  
  Down arrow26,400 or 27,600 by 10/01/2019
  Down arrow10,200 or 11,100 by 10/01/2019
  Up arrow875 or 830 by 10/01/2019
  Down arrow8,000 or 8,750 by 10/01/2019
  Down arrow2,925 or 3,050 by 10/01/2019
As of 09/19/2019
  Indus: 27,095 -52.29 -0.2%  
  Trans: 10,504 -72.12 -0.7%  
  Utils: 860 +3.49 +0.4%  
  Nasdaq: 8,183 +5.49 +0.1%  
  S&P 500: 3,007 +0.06 +0.0%  
YTD
 +16.1%  
 +14.5%  
 +20.6%  
 +23.3%  
 +19.9%  
  Targets    Overview: 09/12/2019  
  Down arrow26,400 or 27,600 by 10/01/2019
  Down arrow10,200 or 11,100 by 10/01/2019
  Up arrow875 or 830 by 10/01/2019
  Down arrow8,000 or 8,750 by 10/01/2019
  Down arrow2,925 or 3,050 by 10/01/2019

Bulkowski's Bearish Wolfe Wave

 

Statistics updated on 7/23/19.

The bearish Wolfe wave is not a chart pattern I found, but one developed by Bill Wolfe. It's a variation of a rising wedge. This article discusses identification and how well the chart pattern performs. It is based on Wolfe's description of the pattern and the charts that accompany his description. It is not meant as a trading setup.

The bearish Wolfe Wave
Bearish Wolfe Wave

 

Bearish Wolfe Wave: Important Bull Market Results

Overall performance rank (1 is best): 49 out of 53
Break even failure rate: 30%
Average drop: 12%
Pullback rate: Not studied
Percentage meeting price target (The EPA line): 35%

The above numbers are based on thousands of perfect trades. See the glossary for definitions.

Bearish Wolfe Wave: Identification Guidelines

Identification has many rules. The picture to the right will help. The chart pattern is a rising wedge with additional geometry to help with trading.

CharacteristicDiscussion ID pic of Wolfe Wave
Turning Points
Point 2This point is any valley (minor low) on the chart.
Point 3This is the top of the hill begun by point 2.
Point 1Wolfe describes point 1 this way: "The 1 point is the top prior to point 2 (bottom), that 3 has surpassed." Look for the top of the hill leading to point 2, providing the top of point 1 is below the top of 3.
Point 4The is the bottom of the hill begun by point 3. Point 4 must be above the price of 2, otherwise lines 24 and 13 will not converge.
Point 5This is the top of the hill begun by point 4. It need not turn on line 13.
Converging LinesLines 13 and 24, extended into the future, must converge. If they do not, then you do not have a Wolfe Wave.
Other RulesThere should not be another higher peak or lower valley between the various turning points 1 through 5. In other words, a valley lower than 4 should not appear between points 3 and 5 nor should a peak higher than 3 appear between points 2 and 4.

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Bearish Wolfe Wave: Trading Tips

Reference the figure on the right.

Trading TacticExplanation ID pic of Wolfe Wave
Wolfe Wave Trading
Sweet SpotDraw a line parallel to line 24 beginning at point 3 and extend it to point 5. The difference between this line and point 5 is the sweet spot. I show that at A as a circle. According to Wolfe, when price is in this area, sell.
EPAWolfe calls this the Estimate Price at Arrival. It is the price where the stock touches line 14 extended into the future. If this line is too steep, obviously price won't reach it. Nor will price go below 0.
ETAThis is the Estimated Time of Arrival. The date converging lines 13 and 24, extended into the future, join to form the apex is called the ETA. Price should reach the EPA on this date (shown as a vertical line). This rarely works.
BuyWolfe suggests using the EPA line as a buy (cover) signal. When price reaches the EPA line, cover the short position.

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Bearish Wolfe Wave: Trading Example

Wolfe wave trading example

The figure on the right shows an example of a bearish Wolfe wave.

Price bounces between the turning points, matching the identification guidelines. Extending lines 13 and 24 into the future show that they converge to join at the apex, which I label as ETA. That is the date the stock is supposed to reach bottom. In this example, it does, right on schedule.

When price rises to or above line 13 (at turn 5), it enters the sweet spot. Short the stock.

Price drops and attempts to touch the EPA line but misses. If it hit the line, that would be the cover signal.

In this example, price rebounds before reaching the EPA line.

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Bearish Wolfe Wave: Testing Methodology

I programmed my computer to automatically identify Wolfe wave patterns. To find peaks and valleys, I found all minor highs and lows within 3 days (3 days before to 3 days after, 7 days total). I used 3,387 stocks starting from 1990 to July 2019 and found 7,086 Wolfe waves. Not all stocks covered the entire period. Excluded were potential patterns with a low price below $5 at the time the pattern formed.

I measured the move from the high at point 5 to the EPA line and to various end points, such as the ultimate low. I only accepted those patterns with point 5 peaking within the sweet spot.

Those performance measures that include the ultimate low should be viewed as perfect trades. Entry is made at the exact high price at peak 5 and riding it down until it drops just before price rises at least 20%. That type of performance cannot be duplicated in real life. The numbers should only be used for comparison to other chart patterns using the same methodology.

Bearish Wolfe Wave: Performance

Table 1: Wolfe Wave Performance
CriteriaResult Wolfe wave trading example
Number of patterns7,086
Number reaching the ultimate low26%
Number reaching the EPA line before being stopped out16%
Number stopped out (price rises above point 5)57%
Out of data1%
Total100%

Table 1 shows how the pattern behaved. The figure on the right may also help. Please note that I did not filter the Wolfe wave patterns by heavy volume at point 5, the slope of the lines or most other considerations (like the price trend leading to the pattern). Wolfe hints that there are other criteria he uses to select better trading setups, so keep that in mind. Consider this the bare-bones setup.

The ultimate low is the lowest low before price rises at least 20%. Twenty-six percent of 7,086 reached the ultimate low.

Another 16% were stopped out but touched the EPA line first before rising above the high at point 5, ending the search for the ultimate low. This tells a trader how dangerous it is to hold onto a stock for more gains once it reaches the EPA target.

Fifty-seven percent were stopped out on their way to the ultimate low. Again, this happens when price turns at point 5, drops some, but then rises above the high at point 5.

The remaining 1% were stocks that ran out of data before hitting any of the other benchmarks.

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Bearish Wolfe Wave: More Performance

Table 2: Wolfe Wave Performance
CriteriaResult Wolfe wave trading example
Number reaching the EPA line35%
Number dropping to point 225%
Number dropping to point 448%
Average drop to EPA line10%
Average drop to ultimate low12%
5% failure rate30%
Average time to reach EPA line14 days
Average time to reach ultimate low24 days

Table 2 dices the statistics differently than in Table 1.

The number of bearish Wolfe waves with price reaching the EPA line was 35%. This is a different measure than the one just discussed (where 16% reach the EPA line and then rise). This measures the number of patterns that touched the EPA line on the way to the ultimate low. The ultimate low was not reached yet, nor was the stock stopped out before reaching the EPA line. Think of this as the measure rule for the bearish Wolfe wave. It is the number of trades that reached the EPA line.

To put the performance into visual perspective, I measured how many patterns reached point 2 and 4 which the table shows. I also measured the move to the ultimate low. This measures from the high at point 5 to the low at the ultimate low (the lowest low before price rises at least 20%).

The 5% failure rate is a count of how many patterns see price drop by less than 5% from point 5 before rising above the top of the pattern (that is, above point 5). The 30% rate I consider high.

The remaining lines in Table 1 detail how long it takes to reach the EPA line and the ultimate low. This is in calendar days, not price bars.

-- Thomas Bulkowski

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See Also

 

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Chart Patterns: After the Buy Getting Started in Chart Patterns, Second Edition Trading Basics Fundamental Analysis and Position Trading Swing and Day Trading Visual Guide to Chart Patterns Encyclopedia of Candlestick Charts Encyclopedia of Chart Patterns 2nd Edition Trading Classic Chart Patterns

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