Tonight I was going to round off the series; but like the last detour, there is a very clear (and rare) pattern I’d like to consider.
Last night I exited crude oil longs I initiated on Jan 24 at 89.525 (basis March). If you are a reader of Nature of Trends, see if you can recognise the current pattern before expanding Figure 1. If you have not read the book, then go to Figure 1 now.
FIGURE 1 Crude Oil Perpetual
The great thing about the Horizontal Terminal is that if it fails, then we have a projection target for the upside breakout. Let’s firstly consider the boundaries of the pattern.
The lower boundary in the pattern is horizontal rather the usual low lower than ‘B’. For the pattern to complete we need ‘E’ preferably to hold below the maximum extension or at least not accept above it. The maximum extension is either 10% of XA or 20% of AB whichever is the greater. Figure 2 shows that this maximum extension comes in at 103.30
FIGURE 2 Maximum Extension
Entry for the pattern is a bearish conviction close below the Primary Sell Zone. Readers of the blog know that I use the 1/8 retracement levels as a substitute for the Market Profile 3rd standard deviation. Figure 3 shows how closely the two often correlate.
FIGURE 3 Primary Sell Zone
Based on the Market Profile, the close would need to be below 98.63 basis the CSI Perpetual Contract. Basis the April contract (and this is the entry price I’d take), the entry price would be below 98.525. The stop above the maximum extension (103.30) would be too large for me. Hence my stop will be:
100.725 + 10% of the range from the current high (100.725 basis April) to the low of the entry bar.
My core profit target would be around 86.40. Assuming we get in at around 97.8, we’d be risking around 3 points for a possible 12-point gain, a reasonable risk:reward. On top of that, this is a forecasting pattern and hence we can look for much more if the pattern plays out.
That’s where the Nature of Trend material would take the analysis. If you use the Ray Wave, then we can use it to provide the context, which will either confirm or cast doubt on the Horizontal Terminal scenario. I use the Ray Wave as a roadmap and context validation tool.
Figure 4 shows 3-wave structures that have hit a cluster of price targets around 99 to 100 basis the Perpetual Contract. It also shows the two possible scenarios:
- A completion of the Horizontal Terminal [Wave (3) ends around last night’s high] and
- A failure of the Horizontal Terminal {Wave (3) ended at A and formed wave [1]}. If this proves to be the case, then the Ray Wave projects a target to 115.
I favour the first scenario unless we have a strong bar up in the next three days breaking to new highs and accepting above 103.30
FIGURE 4 Ray Wave
Refer this blog post to a friend or colleague…
