What is a Wolfe Wave?

From a technical point of view, this is a pattern that occurs naturally and can be found in all financial markets. The whole pattern is composed of five waves that show supply as well as demand and their struggle to get to an equilibrium price. We can see them developing over short-term as well as long-term time frames and use them to make a price/time projection towards the level where the price is heading and the approximative time it will arrive.

This wave pattern was discovered by Bill and Brian Wolfe, hence its name. Bill Wolfe is a very active businessman who trades S&P preferrently. Bill’s theory about the structure of this pattern is based on Newton’s laws of motion (for every action there is an opposite reaction). This pattern allows to make a quite accurate projection of expected target prices, and at the same time it allows to employ a tight risk margin as the market situation where our hypothesis would be null and there is no more reason to continue holding the position is accurately defined.

Rules:

Waves 3-4 must stay within the channel created by 1-2
Wave 1-2 equals waves 3-4 (shows symmetry)
Wave 4 is within the channel created by waves 1-2
There is regular time between all waves
Wave 5 exceeds trendline created by waves 1 and 3 and is the entry point
The estimated price is a price along the trendline created by waves 1 and 4 (point 6).

Sources (web):

Investopedia

WolfeWave

USDCHF Long-term Monthly outlook

We might be having an extremely long-term Wolfe Wave pattern on the monthly charts for the USDCHF. I had initially marked the A-B segment as the first 1-2 wave, however there is also a possibility of a more “technically correct” wave taken on the next shorter swing high (1-2 on the chart), as in the first case, point 3 should ideally be a bit lower than point 1. We can however see in the several examples given in the Wolfe Wave site that not every Wolfe Wave is taken strictly “by the book” in this particular.

In any case, we can see that both the A-4 and the 1-4 projection lines are superposed. I like the A-B starting wave because it gives me a precise point in time with the intersection of A-3 and B-4 trend lines (blue ETA), while there is no intersection of the 1-3 and 2-4 trend lines as this would be an expanding descending channel. An intermediary variation using A-3 and 2-4 intersection gives a second ETA point farther in time.

Additionnally, in this particular case of the Monthly USDCHF, we have that point 5 coincides with a 138.2% Fibonacci extension on wave 2-3 and a 161.8% extension on wave 3-4 (and a 127% extension on the A-B range).

Now, another “hidden” Wolfe Wave (chart below) would lead us much farther in estimated time arrival, about 6 years ahead (2017).

That target EPA/ETA coincides with June 1989 highs on the monthly charts.

Well, that’s a lot of room for speculation! 

Although there is still a potential for this pair for a continuation of the fall towards the 138.2% Fibonacci extension on the A-B range, which also coincides with the 161.8% extension on the 2-3 previous swing low, and thus extending point 5 a little more, on the long term scope it would seem that we are arriving near a bottom and price went exactly at the 127% extension of the A-B range, and near the 161.8% extension on the 3-4 range. 

Maybe it’s time to start thinking of a good correction and maybe, if the long-term Wolfe Wave plays out well, a total trend reversal for the USD. 

I would favor a bullish correction to what I’ll call the “Comfort Zone” (circled in pink on the previous chart), a nearly 2000 pip range between 1.1290 and 1.3285 (delimited by December 2004 lows / November 2005 highs) with a particular attention to level 1.2734 (October 1998 lows), 1.2288 below as the median line of the range, and round number 1.3000 which could become a magnetic target level. 

An overview of the Weekly chart below shows both bearish and bullish potential levels for this pair, adding as a side note that prices have usually been evolving in a +3000/-3000 range along its evolution, in regard of the SMA200.

Daily Overview

We can see how price held at the 127% Fibonacci extension from the A-B range (second monthly chart above, zoomed-in) and at the daily 138.2% extension from the previous swing low. Also, we have stopped exactly at the middle line of the descending Pitchfork channel, which could signal a bounce back towards its upper trend line. A correction towards the middle line of Bollinger bands (SMA20 – around 0.9230) and possibly to the SMA34 level at 0.9400, also upper Pitchfork trend line, could be on view for this pair. Next levels to watch would be 0.9590 (38.2% Fibonacci retracement and SMA100) and 0.9766 (61.8% retracement and SMA200, as well as previous February highs).

My views are preferrently bullish for the Swissie, however some further extension to the downside is to be carefully watched for, especially if we break again the middle line of the Pitchfork.