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Sweet Crude Oil, June 2013 Futures - Wolfe Wave Set Up

It was yesterday's news that caught my attention about the rising supplies for Crude Oil. After the hype kind of settled down, this morning I happened to check on what was happening with CLM3 futures contract.

On the H1 chart, I noticed a Wolfe Wave formation. For those who want to read more about Wolfe Waves, here is an introductory article.

Anyways, so maybe I was lucky enough to find the formation at the right time because Wave 5 was already formed and the peak was validated as well.

Crude Oil Futures - Wolfe Wave, H1 Chart

Chart Set up

  • The pivots are marked in the chart which show the start/end points of the waves and is quite self-explanatory.
  • I then draw a parallel lines (P2-P4 Parallel lines) and project them from P1, and project the parallel line from P1-P3 and project that from P2. This above set up basically gives us an idea of how price is likely to react and also gives a confirmation of that the Wolfe Wave is valid.

Observations

  • After P4 was formed, the 4th wave, moved up and reversed just short of the projected P2P4 trend line. After noticing a clear reversal, I short CLM3 with stops just a few points above the peak created by wave 4.
  • Riding the Wave 5 downwards, the target price is projected based on two facts. The first being the trend line connection P1-P4. But this gives us an unclear view simply because Wolfe's ETA (estimated time at arrival) overshoots the EPA (estimated price at arrival).
  • Therefore, in order to get a more realistic price target, drawing a parallel of P1P3 and projecting it from P2, gives us a cross of the trendline P1P4, which cuts at 94.22, which is where CLM3 futures is likely to head.
  • I might add to my position at 95.57 as it is the price point of convergence of both trend lines P1P3 and P2P4.

Footnotes

As with any indicator, trading purely with Wolfe Waves is not recommended as I have learnt it the hard way. Always have at least 2 different methods to calculate price projections. ex:- Fibonacci.

Using another commonly used method of trendlines, I get another price point of 92.12, which re-affirms the price target given by Wolfe Waves.

There is still a bit of upside move left as previous target level of 97.18 hasn't been reached. So stops for the already open short trade would be around 97.77 to .83, just a few points above April 1st High. Also placing a pending SELL limit order around 97.1. Target prices remain the same however.