CLMT – Great Long-Term Set-Up with a Great Short-Term Launch

Neely’s B-Failure Flat Set-Up

A Crash Followed by a Partial Retrace Followed by a Return to the Crash Low is a Set-Up for a Return to the All-Time High

A Crash Followed by a Partial Retrace Followed by a Return to the Crash Low is a Set-Up for a Return to the All-Time High

Glenn Neely’s book, Mastering Elliot Wave (Version 2), provides a useful collection of trading set-ups and data. One particular set-up in Neely’s book that has paid off time and again in recent years is a formation he calls a B-Failure Flat.

You tend to see these formations after crash waves like QQQ’s crash out of the dot-com bubble and the big 2008 plunge in oil. If the crash wave takes a particular form, the reaction wave (or “B wave”) that follows tends to retrace roughly 60% of the crash.  It doesn’t have to be 60%.  It just has to be a significant retrace that doesn’t make it back to the high.

The B wave reaction tops with range trading, typically forming a head and shoulders or megaphone top or an extended triangle, then the price collapses (in a “C wave”) back to the crash wave low.

CLMT (Calumet Specialty Products) is about to complete this pattern.  After it completes a bottom, its next target is the all-time high.

Here’s the set-up on QQQ:

Neely B-Failure Flat Set-Up on QQQ

Neely B-Failure Flat Set-Up on QQQ

Here’s the set-up on oil:

Same Set-Up on Oil

Same Set-Up on Oil

It’s a set-up about a price that is taking huge swings around a correct price roughly in the middle.

A Great Short-Term Entry is Setting Up for CLMT’s Big Move Up

CLMT Opted to Start a Bottoming Pattern in the Critical Decision Wave of its Navy Price Channel

CLMT Opted to Start a Bottoming Pattern in the Critical Decision Wave of its Navy Price Channel

CLMT appears to be putting in an island bottom with a neckline at roughly 6 (see top chart).  Obviously a gap up from an island bottom would be a great set-up to get long.

But for more nimble traders, a beautiful price channel bottoming set-up can get you in closer to the bottom.

Specifically, on the move down out of the early 2017 high, CLMT confirmed a price channel (navy blue in chart above).  And in the channel’s critical decision wave (meaning the new channel low after two alternating touches on both the top and bottom), CLMT took a swing back up to the channel top rather than breaking out the bottom.

That channel provided a beautiful melt-down set-up to zero if CLMT was heading into bankruptcy.  Instead CLMT started a megaphone bottom (pink in chart).  A breakout now through the channel top would target roughly the pink megaphone top at the 200 dma.  A final retest of the 40 dma would be the retrace to the pink megaphone VWAP that would set up a breakout up to the island bottom neckline at 6.

Typically there would be a bit of a consolidation there before the gap up into the big move up.

CLMT would typically bog down at roughly the 30 level on its big move up–usually to attempt a topping pattern like a head and shoulders at the red megaphone VWAP.  The topping pattern would usually end up breaking out upwards to set up a big rising megaphone melt-up back to the all-time high.

We could also see a big Sornette melt-up set-up across 30 before blast-off.

Hat-tip to @jasteindorf1 for the stock. He has personal expertise in this company and product. The view of the stock provided, however, is strictly based on chart trading set-ups, not fundamentals.  Do your own due diligence.

You could long on the price channel breakout and set your stop a little below the pink megaphone VWAP or 40 dma after breaking through.

Oil Triangle vs Price Channel

If Oil Puts in a New High in its Potential Price Channel (Red) Before Breaking its Bottom, It's a Potential Melt-Up Set-Up

If Oil Puts in a New High in its Potential Price Channel (Red) Before Breaking the Channel Bottom, It’s a Potential Melt-Up Set-Up

Oil has bounced off the bottom of a potential price channel (red on chart). If it should make a new channel high before breaking the channel bottom, it will be in its critical decision wave for setting up a melt-up vs. forming a channel top.

A melt-up set-up (purple on chart) would target 75.

If oil kills the price channel set-up or elects to form a channel top on a new high instead of breaking out into a melt-up, it’s forming either a triangle (navy blue on chart above) or a megaphone.

Here are the scenarios on the 60-minute chart:

Oil Scenarios on the 60-Minute Chart

Oil Scenarios on the 60-Minute Chart

The green scenario is the most likely at the moment.

Oil Appears to be Holding Up ES

Oil is Headed to the Top of the Triangle Right Shoulder on its Inverse H&S

Oil is Headed to the Top of the Triangle Right Shoulder on its Inverse H&S

Oil is surging for the neckline of its inverse H&S but it needs another pullback from it to complete a triangle right shoulder on the formation.

The pullback doesn’t have to be all the way to the bottom.  The target for a breakout from the inverse H&S would be roughly 78.

The market’s excited about OPEC pretending that it will cut back production in January, but typically there would be no actual cutback and everybody in the business knows it.  So there’s still a good chance of the inverse H&S morphing into a triangle before a lower low that would set up a bigger inverse H&S (purple scenario).

QQQ is taking another hit today, but ES seems to be held up by oil.  The best chance for a December dip in ES should be when oil reverses off the inverse H&S neckline.

If oil breaks through the neckline here without a pullback, it’s likely just going for the blue megaphone top before a move to its bottom to morph the triangle right shoulder into a megaphone right shoulder (not drawn).  That’s another way of setting up a larger inverse H&S to take out the January low.

Oil Inverse H&S vs Triangle

Oil Inverse H&S with Triangle Right Shoulder vs Triangle to New Low

Oil Inverse H&S with Triangle Right Shoulder vs Triangle to New Low

Oil is megaphoning across 44ish right now deciding whether it’s putting a triangle right shoulder on an inverse H&S (purple scenario) or whether it’s forming a larger triangle before a new low (green scenario).

If oil takes out the August low here or even gets close enough to it, the green scenario is playing out.  It’s a tough time of the year to run the purple scenario.

The good thing for oil bulls is that a new low would set up a bigger move upon breakout from a bigger inverse H&S.  A new low would probably go lower than the one I’ve drawn and take more time forming a bottom at the new low.