Bullish Reversal Patterns in WFR

Apr 1, 2009: 10:41 PM CST

MEMC Electronic Materials (WFR) is forming a rather bullish reversal pattern that can serve as an educational example of how a Rounded Reversal forms, how the “Cradle” sets up, and how a multi-swing positive momentum divergence forms.  Let’s see them.

A higher timeframe chart will show WFR resembles Crude Oil (and USO) in terms of its decline and then multi-swing positive momentum divergence that began back in October 2008.  One divergence can be a signal that the next retracement might be larger than expected – a multi-swing divergence can frequently precede a trend reversal.

A consolidation triangle formed all through 2009, and price has broken strongly to the upside out of the triangle on a volume surge last week.  Momentum (3/10 Oscillator) also broke out of its own triangle consolidation, hinting that higher prices are yet to come.

After the divergences and triangle formed, the recent price action in March allowed price to break out gently above the 20 and 50 day EMAs, and eventually the “Cradle Trade” (my favorite) formed which occurs when the 20 EMA crosses above the 50 EMA at a specific point, and price comes back down to test that point.  The Cradle is great because it often precedes trend reversals and if the reversal fails to materialize, you can place a tight stop beneath the confluence level and so your risk is low to ‘find out if the cradle will hold.’

I really wanted to show this chart for educational purposes, as it shows a good example of the following concepts:

Multi-Swing Positive Momentum Divergence
Triangle Consolidation (and break-out on high volume)
“Rounded Reversal” (in price)
Cradle Trade

See if you can find additional lessons in WFR’s price structure.

Corey Rosenbloom
Afraid to Trade.com

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10 Comments

10 Responses to “Bullish Reversal Patterns in WFR”

  1. Anonymous Says:

    corey,
    so when does the cradle fail ? When and if, the 20 goes back down through the 50 EMA ?

  2. Corey Rosenbloom Says:

    The Cradle Fails when price breaks through it, triggering the tight stop. One can exit on an EMA crossover, but one can exit as well when price breaks the expected confluence zone.

  3. gawed Says:

    hey corey, whassup?

    i’ve seen some craddles fail and then come back and fulfill the trade albeit a bit late… is it possible to see this “fake fails” or is it better to just stick to your stop and ride the next one?

  4. Jer Says:

    Corey, interesting that you should mention WFR…I’ve been long this one since 3/10 based on my own (technical) analysis. I think it’s interesting to see how two seemingly unrelated forms (I use mean-revision and overbought/oversold indicators) of analysis can come to strikingly similar conclusions. Love the blog.

  5. Vasu Says:

    http://www.marketwatch.com/m/story/e2c25817-2932-46b1-a832-5eea6de4ff3d/0

    robert prechter’s view saying we are in the 4th wave and that 5th wave is going to be scary.

  6. Corey Rosenbloom Says:

    Gawed,

    The Cradle is a new phenomenon I’ve discovered and so I need to do more testing with it.

    But it’s just like any other pattern – it derives its edge from the low risk of a tight, known stop relative to a large target. One winning trade can make up for 2 or 3 losers so it’s probably best not to try to finesse every individual trade if it messes up the edge.

  7. Corey Rosenbloom Says:

    Jer,

    Thank you so much for reading and for your comment.

    It is good when multiple, non-correlated methods combine to tip the odds clearly in one direction. I think trading is about discovering as much evidence as possible and then taking a trade with a known risk point and then letting the profits take care of themselves.

  8. Corey Rosenbloom Says:

    Vasu,

    Thanks for sharing the article.

    Actually, as I understand it, Prechter has the same ABC Count (starting in 2000) but instead of debating “which wave just completed – the Third or the Fifth” as I show both sides on the blog, Prechter (and staff) unequivocally state that the 5-wave fall from 2007 was actually Primary Wave ONE and that we are now in primary wave 2. That means a hideous Wave 3 is yet to come. Then Wave 4 up. Then a Wave 5 (circled degrees like I show on my Elliott Count charts).

    And that his ultimate target on the Dow Jones is 400.

    No, that’s not the S&P – that’s the Dow Jones – you know, that which trades at 8,000 today.

    Needless to say, I do not by any means share that view.

  9. Anonymous Says:

    there is a lack of volume on breakout. the volume came after the breakout. id like to see it retest triangle before buying it. also think market going down so i wont purchase

  10. Corey Rosenbloom Says:

    Anon,

    Actually, the volume came with the upside break and on the retracement back down to test the breakout zone, the volume has dried up which is quite bullish. A retest would be good but sometime we aren’t fortunate enough to get a clean retest.