WaveStructure

From time to time, we receive trade recapitulation messages in our inbox. We decided to publish this one on the blog as it is a beautiful case. Our member was holding a bearish view on the financial sector and had already accumulated some shorts on big banks like JPM:US and USB:US. WaveStructure issued a bearish 0-4 line break alert as the price of FRC:US closed below the 0-4 line on February 24, 2023.

But first let us look back as it is quite important to explore the wave context. Beginning in November 2021, First Republic Bank experienced a monthslong downtrend. In this period WaveStructure charts correctly identified the unfolding of a 5 wave down move and held a sell rating on the stock. Wave 5 bottomed out on May 12, 2022, and a corrective upside ABC pattern evolved during the summer of 2022. The final top was reached on August 16, marked with 0 on the chart. A sharp decline unfolded in the following months registering a 36% drop in price on October 21, which traced out the first 3 waves of a 5-wave bearish sequence. Please keep in mind that this decline does not seem that extreme on the chart below only because the 5th wave drop is so out of proportion that it has altered the scale (moreover, we are using linear instead of a logarithmic chart). A nice corrective 5-wave up structure characterized with a lot of overlapping and ending right at the 0.618 Fibonacci level ended on February 2, 2023. This fit perfectly in the classic definition of a "sideways fourth wave" and as soon as the start of wave 5 down was identified, our rating for FRC:US was downgraded from Sell to Strong Sell.

Returning to our member’s trade journal: The Friday (February 24) close broke below the 0-4 line triggering an alert about the potential bearish move. On Monday, February 27, FRC:US gapped up on the open which reduced our client's conviction in the trade and lead to a partial short position (marked #1 on the chart). A few days later, on March 2, price opened with a down gap which was reassuring (complemented by 3-days of failed attempts to penetrate the 0-4 line from below) and the short was increased to 1.5 times the standard position size (marked #2). Price then found resistance at the 0-4 line from below for a second time and fell nearly 5% with a wide-ranging bar breaking through any support. On the next day, March 8, the short was rounded up to close to 3 times the standard position size (marked #3). This is also the date when Silvergate Capital announced the ceasing of its operations and Silicon Valley Bank disclosed their liquidity issues. While we do not have information on where and when exactly our member covered the shorts, the 99% drop in price that followed had him use the label "my trade of the decade". We are proud to have been a part of this rollercoaster. Having identified and alerted our subscribers about the potential trading opportunity a week and a half before the crash unrolled and the media put focus on the bank, brings meaning to all the hard work that we do here every day at WaveStructure for our clients and partners.