What a difference a few days can make on a chart. Last week we had a pooch through the top rail of our rising wedge formation and everything looked ready to move higher. Yesterdays action was a defining moment for me when we closed below the bottom rail. It told me that the rising wedge pattern, created over the last 4 months or so, was not going to play out as I had hoped. This sharp breakout through the bottom of the wedge is signaling that the rising wedge is in fact a bearish rising wedge. The rule of thumb on price objective is that we should correct down to the 1st low created within the rising wedge, to around the 370 - 380 area.
This is not a time to panic as we are already halfway to our PO of between 380 and 400. This is a time to pick your spot to add to your core position not to sell into weakness.
The daily look shows the clear breakout.
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The next chart is a little longer version showing the diamond consolidation pattern with the all important BLACK trendline that runs thru the top third of the chart. That black trendline is the one I showed for support or backtest when we broke out of the diamond pattern back in Sept. of last year. That is a very powerful trendline as you can count at least 7 times, during the diamond consolidation, that we failed to breakout above that trendline, telling me it was hot and if we ever broke above it that it would work as support on any backtest. Notice after the breakout of the diamond formation where the backtest occurred, right on top of the black trendline at roughly the 380 area, perfect.
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The last chart is a weekly line chart showing the whole bull market to date. I posted this chart several months ago showing a possible new wave count for me. What this chart shows is a 4 year bullish rising wedge formation or running correction, blue trendlines, which would be our wave II. The rising wedge was complete after the 4th reversal point, C on the chart, and a breakout of the top rail would signal that our long awaited wave III was under way. It looks like we are going to have 6 reversal points within the bullish rising wedge which is not out of the ordinary. Yes it is painful and time consuming but we can’t tell the market what to do, we can only follow her lead. If she says one more reversal before we take off that is what it will be.
So the bottom line is we are in one more reversal down to the bottom of the bullish rising wedge and the black dashed rail, that should take us to the 375 to 400 area where strong support should come in.
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It is very disappointing as the 4 month rising wedge pattern is resolving itself to the downside but the good news is that we have a good target for a bottom area which is not very far off. This market will either make you or break you depending on your personality. All I can say is stay strong and take advantage of this correction if you can as the fundamentals are saying there is alot more inflation coming down the road.
All the best…Rambus