Harmonic Impulsive Wave: Extreme Bearish and Bullish Wave

STANDARD AND POOR’S 500 DECEMBER 2009

MINI-CONTRACT (ES_Z9): 60-MINUTE

EXTREME BULLISH HARMONIC IMPULSE WAVE 

This example of the S&P 500 December 2009 mini-contract on the 60-minute chart shows an ideal situation of an Extreme Harmonic Impulse Wave that possesses a perfect structure (see Figure 2.8).

FIGURE 2.8

The prior Bearish 1.13 extension established the structure, as a sharp reversal following the failed breakout resulted in an extended decline. In this case, the ES mini-contract sold off to the short-term 1.618 extension of that failed 1.13 breakout attempt and reversed exactly at this level.

EXTREME BEARISH HARMONIC IMPULSE WAVE

The Extreme Bearish Harmonic Impulse Wave is a distinct structure that requires a few essential elements to validate the structure. After an extended decline (0-X), the price action typically experiences a brief consolidation that results in a nominal new low. This consolidation area (X, A, B) is followed by an extended rally to at least the 1.618 AB extension area, as illustrated in Figure 2.9.

FIGURE 2.9

This BC segment rally is the most important aspect of the structure, as it manifests the extreme and impulsive nature of the setup. In fact, these structures frequently form within many defined bearish channels, and they can offer excellent opportunities to sell overextended rallies that are counter to the primary trend.

LIGHT SWEET CRUDE MARCH 2006 CONTRACT (CL_H0): 15-MINUTE

EXTREME BEARISH HARMONIC IMPULSE WAVE    

The nature of the Extreme Bearish Harmonic Impulse Wave is exemplified in the chart in Figure 2.10. The 2010 March Crude Oil contract was declining steadily on the 15-minute chart until it rallied sharply to form the Extreme Bearish Harmonic Impulse Wave. The price action bounced quickly to test the intra-day 1.618 impulse extension.

FIGURE 2.10

The price action reversed quickly after testing the impulsive extension and continued lower, as the predominant downtrend squashed the brief rally. Situations like these develop frequently on intra-day charts, and they can identify excellent opportunities to take advantage of overextended short-term rallies within established downtrends.

EXTREME BULLISH HARMONIC IMPULSE WAVE @ 0.886 RETRACEMENT

The Extreme Bullish Harmonic Impulse Wave at an 0.886 retracement, illustrated in Figure 2.11, is a special situation that combines two critical harmonic measurements to define the trade opportunity. The combination of the 0.886 support with the extreme impulse extension frequently provides a brief reversal in most cases. This initial reaction provides many short-term trades at a minimum.

FIGURE 2.11

The structure represents a unique test of a critical prior support point. Although the bullish 0.886 retracement is a powerful potential support point on its own, an Extreme Bullish Harmonic Impulse Wave that possesses at least a 1.618 extension provides a short-term technical phenomenon that produces many reliable setups. It is important to note that many of these situations result in only brief reversals and require decisive continuation following the completion of the setup to signal a larger move at hand. But this unique structure can offer many profitable opportunities, as long as the trade is executed on the initial test of these harmonic numbers and the management of the position is handled tightly. Furthermore, reversals in these situations require an aggressive profit-taking approach, since many of these reactions are sharp but brief rallies.

AMEX GAS AND OIL EXCHANGE ($XOI): DAILY

EXTREME BULLISH HARMONIC IMPULSE WAVE @ 0.886 RETRACEMENT

This example of the XOI possessed all the ideal elements to validate the Extreme Bullish Harmonic Impulse Wave at an 0.886 retracement (see Figure 2.12). The failed rally of the AB leg preceded the sharp decline that resulted in a convergence of the 2.0 Bullish Harmonic Impulse Wave extension and the 0.886 retracement.

FIGURE 2.12

The structure defined a precise area at 1030 for a short-term bounce at a minimum. In fact, both of these critical harmonic measurements completed within two points of each other. Although the price action required a secondary test of the PRZ, the decisive continuation following the completion of the structure clearly indicated a strong rally at hand.

BEARISH HARMONIC IMPULSE WAVE @ 0.886 RETRACEMENT

The Extreme Bearish Harmonic Impulse Wave at an 0.886 retracement, illustrated in Figure 2.13, is a special situation that combines two critical harmonic measurements to define the trade opportunity. The combination of the 0.886 resistance with the extreme impulse extension frequently provides a tradeable, short-term opportunity at a minimum.

FIGURE 2.13

PHILADELPHIA GOLD AND SILVER INDEX (^XAU): DAILY

BEARISH HARMONIC IMPULSE WAVE @ 0.886 RETRACEMENT

The next example of the XAU—Philadelphia Gold and Silver Index—shows an ideal Bearish Harmonic Impulse Wave at an 0.886 retracement (see Figure 2.14). In fact, the impulsive nature of the AB leg and the extended BC leg manifested the ideal elements that the structure should possess—a sharp rally that converges with a distinct 0.886 retracement. This creates a unique technical situation that defines a precise PRZ of harmonic resistance.

FIGURE 2.14

HARMONIC IMPULSE WAVES CONCLUSION

Although many Harmonic Impulse Waves are merely the precursor of complex patterns, these formations can be defined well in advance to define profitable short-term trading opportunities. Furthermore, the identification of these structures helps to classify price action within an expected technical framework that adheres to specific ratios. The understanding of harmonic structures like these helps to decipher price action more precisely and to define the potential future trend direction more accurately. The minimum 1.618 extension requirement is an important technical aspect of the structure and helps to differentiate this setup from other invalid candidates. Although Harmonic Impulse Waves are not the same as the traditional M-type and W-type structures, they serve to distinguish random price moves and refine harmonic price action even more clearly.