Friday, September 9, 2011
Wedge Failed breakouts
Often when the gap on open is large, there is an expectation of a trend move. While trend from the first bar is a reasonable expectation, some gap days will only result in a trading range. However, on some days you will see a wedge attempt in one direction that will take out the low of the day and often result in a measured move of the opening range.
The Wedge on open could form either with the gap or against the gap. When the wedge is with the gap as in today, it often appears as a variation of a 2-legged pullback to the ema.
To identify wedge on open, look for a large first bar (signifying TR), preferably with large tails (also TR) or overlaps (b3,4 -- also TR). After the initial move, the market will move in three pushes in either direction and give an entry fading the range. When the wedge move reverses the initial move and takes out the range extreme (b1 high), its a wedge failed breakout or WfBO. WfBOs are trend generators and should always be taken as a swing setup. At the very least they give two legs, often taking out the other end of the range. If the range is taken out in one leg, they often give a measured move of the range.