DummySpots.com

A heads-up on a swing setup I’m watching on GOOG. I was thinking today about the significance of the fact that Google was not participating in the huge rally. I was poring over the chart, noting that each peak in the recent series of highs was on lower volume than the last. Then the words “series of highs” rang a bell- I took another look, and realized we’ve got a Three Little Indians setup.

About a nanosecond after this Dummy Spots a Three Little Indians setup, he mentally draws lines to see if it’s a Wolfe Wave. (For a step- by- step discussion of what I consider to constitute a Wolfe Wave, and the theory of how it plays out, you can refer to this post I wrote about an intraday Wolfe Wave). Today’s GOOGle chart meets my criteria:

The lines connecting the “1-3″ peaks and the “2-4″ troughs (blue on this chart) form an ascending wedge into an uptrend. The “4″ low is lower than “1″ but higher than “2″. And finally, the “5″ peak breaks above the “1-3″ line. Bingo. Wolfe Wave.

As I explained in that previous article, these setups are traded by shorting a break of the “5″ extension with a target (a clearly-defined target is the best part of these waves) derived by drawing a line from the “1″ peak through the “4″ trough:

On this chart, I’d short below the recent low around 540, with a stop at the high of 548.74. The extension line gives a target price of about 515 or so. That’s a target gain of $25 with an initial risk (Tah Dah! “R“) under $9, a very decent ratio for a swing chart.

The big question is whether it’s even possible for Google to fall with the market soaring like it did today. Well, it sure managed to close down today, so maybe it is possible.

What I do not want to do here is wait until after a successful setup has played out, then throw up charts and say “Look! If you’d bought here and then sold here, you’d have made a bazillion dollars!”. Everybody and his brother does that, and everyone looks like a genius in hindsight.

When possible (usually is with daily charts, not so much with intraday), I like to toss out an evolving setup, so we can follow along as it unfolds. Sometimes they fall apart. Sometimes they work out beautifully. Both scenarios are a part of trading, not just the pretty ones. You can never look at enough succesful setups on charts to be able to only trade the ones that work out that way. What you can do is recognize good setups, manage your risk, and trade your plan.

Let’s see where Google takes us, and whether the Wolfe howls.