TickerBandit's Blog : Are we seeing what we want to see? More on the Megaphone ....

Below is an example of the most recent failure to finish a Megaphone formation from wave 4. We know once the Megaphone is completed, that there is a 90% probability of a lower low to follow a lower high. But what is the probability of the formation completing from wave 4?

The failure rate of completion from wave 4 I haven't found any documentation of.

Naturally if wave 5 is completed that is a sign of extreme weakness so it makes perfect sense that it will be followed by more weakness. But the probability of a 4 wave pattern being followed by a completed megaphone must carry less probability than weakness following the complete 5 wave formation. This is true of all the wave points. For example the probability of wave 1 being followed by 2,3,4,5 is rather small, which is why, the megaphone formation is a rare formation.

I didn't have to go back very far to find a wave 4 formation which failed to complete the megaphone. The chart is below. What if there is a 70 percent probability that the formation is completed? Then there is a 70% probability we will trade at the support line.

OK, under this assumption, what is the probability that we have seen the top of a bear market rally? Just multiply .7 with .9 and what we get is a 63% probability that we have topped.

Not so reassuring as 90% is it?

And how can one determine if Wave 5 is failing to happen? First one must identify something which isn't supposed to happen. We aren't supposed to break out of resistance. And yet we did on Friday, with a close, on higher volume, with a NYSE 15 to 1 up day. So it is already consistent with failure though we likely need more closes above the resistance line.

So everyone judge for himself and be true to himself in the judgement. How likely is it that the present 4 wave formation is actually a Megaphone formation?