Well, I wasn’t planning to write a post, but I was studying tonight and thought this was good enough for at least a quick post to take some of the posting weight off ‘ole Tim’s shoulders.
I specifically went looking for any portion of the 2000 or 2008 bear markets that formed a daily falling wedge and I found one indeed at the beginning of the 2000 bear market.
I was looking for a case where the weekly band was being repeatedly hit and overthrown (as is typical in an actual bear market rather than a corrective period) with competing trend lines narrowing into a falling wedge over months of trade.
Other than the time length of the patterns themselves, the similarities are striking to me.
Here are the charts:
In 2000, the falling wedge pattern actually started as a channel (black) until perhaps failure to hit the lower channel line in late November and late December (marked with an A) made it apparent that the sellers were just not quite strong enough to push price low enough to continue the pattern thus making the solid blue line the dominant support line. Note that all the candle breaks were intra-week so on a weekly chart the candles would have deep lower wicks. I haven’t looked, but I suspect the falling wedge would be even more obvious on the weekly chart. In any case, the converging trend lines (once formed with at least upper points and two lower points) lasted approximately two months before one side finally won out and formed a new channel at the upper dashed blue line which is a mirror image of the solid blue support line.
Remember that. Broken wedges become channels.
The support line had two solid tests with two large and clear demand bounces on the first trading day of 2001 and then again a few days later forming what certainly appears like a H&S continuation pattern which FAILED. After that failure, the rally was on which lasted about three more weeks completing the month of January on a high (how’s that for the January barometer). These longer duration rallies happen periodically in bear markets so it’s important to not get stuck on the idea that price just falls every week. Once the tide turns, don’t fight it staying short. Listen to what price is saying (there were signs there!). Protect capital and wait for the downtrend to reassert itself. You’ll have more money to short with when the rally is over.
In the present day, price had the opportunity to form a downtrending channel a couple of Thursday’s ago on February 24th (marked with an A), but as you all know, it rocked from the low pretty much from the open and didn’t look back for a couple of days making for a successful intra-week support test. In my mind, this solidifies the blue support as the dominant support going forward and should hold. Price closed right on support today so I would be looking for a rally tomorrow and preferably a strong one which may initiate a 4-6 week rally (or however long it takes) to get to the upper blue dashed channel line. A major sign that the rally is in progress will be if the S&P500 can retake its 20day MA. If it gets above, the safe bet if you’re a bear would be to sit back and wait for the 20MA to get taken out again.
The only thing I would like to add is that even though I have presented two very similar patterns here, I would caution to not get just one picture in your head of how price should move. I think it’s important to have several scenarios of how price MAY proceed (bullish, neutral, and bearish) and to align oneself with the patterns that are completing.
And with that said, now we sit and wait to see how it all plays out…
Hi there! It’s Tim! Thank you, ClosingBasis, for all the above. I thought I’d augment this post with a layered chart, which I was inspired to do based on the ideas that CB has given us.
