As of 09/19/2019
  Indus: 27,095 -52.29 -0.2%  
  Trans: 10,504 -72.12 -0.7%  
  Utils: 860 +3.49 +0.4%  
  Nasdaq: 8,183 +5.49 +0.1%  
  S&P 500: 3,007 +0.06 +0.0%  
YTD
 +16.1%  
 +14.5%  
 +20.6%  
 +23.3%  
 +19.9%  
  Targets    Overview: 09/12/2019  
  Down arrow26,400 or 27,600 by 10/01/2019
  Down arrow10,200 or 11,100 by 10/01/2019
  Up arrow875 or 830 by 10/01/2019
  Down arrow8,000 or 8,750 by 10/01/2019
  Down arrow2,925 or 3,050 by 10/01/2019
As of 09/19/2019
  Indus: 27,095 -52.29 -0.2%  
  Trans: 10,504 -72.12 -0.7%  
  Utils: 860 +3.49 +0.4%  
  Nasdaq: 8,183 +5.49 +0.1%  
  S&P 500: 3,007 +0.06 +0.0%  
YTD
 +16.1%  
 +14.5%  
 +20.6%  
 +23.3%  
 +19.9%  
  Targets    Overview: 09/12/2019  
  Down arrow26,400 or 27,600 by 10/01/2019
  Down arrow10,200 or 11,100 by 10/01/2019
  Up arrow875 or 830 by 10/01/2019
  Down arrow8,000 or 8,750 by 10/01/2019
  Down arrow2,925 or 3,050 by 10/01/2019

Bullish AB=CD®

 

Initial release: 6/22/2018. Rank updated 7/25/19.

Overview

This article describes my analysis of the bullish AB=CD pattern as described by publicly available information and common sense rules to determine valid patterns. Additional rules may or may not improve performance. I tested the pattern using only the below identification guidelines.

The bullish AB=CD is a measured move down chart pattern except that the turns are located using Fibonacci ratios.

The pattern correctly predicts point D 57% of the time. By using the next higher Fibonacci ratio in the measure rule, you can boost the accuracy somewhat, to 65%. I'll explain this in Trading Tips.

The AB=CD pattern
Bullish AB=CD

 

Important Bull Market Results

Overall performance rank for up/down breakouts (1 is best): 37 out of 56/27 out of 53
Break even failure rate: *18%/26%
Average rise/decline: *39%/14%
Throwback/pullback rate: 63%/64%
Percentage meeting predicted price target (point D): 57%

The above numbers are based on at least 1,125 perfect trades. See the glossary for definitions.

* As measured from the peak at point D, regardless of the breakout direction.

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Identification Guidelines

 Characteristic Discussion
Peaks/ValleysThe peaks and valleys in the pattern need not be consecutive. This is not a guideline, but an observation.
ABCPrice drops from peak A to valley B then retraces to C. Retrace CB as a percentage of AB should be one of the following Fibonacci ratios: 38.2%, 50%, 61.8%, 70.7%, 78.6% or 88.6%.
BCDAfter reaching a low at B, price rises to C followed by an extension to D. The CD/CB extension measures one of 113%, 127%, 141%, 161.8%, 200%, 224%, 261.8%, or 314%.

Find four turns where the ratio of one leg to another is close to the Fibonacci numbers listed in the prior table.

What does "close" mean? In my tests, I used 1% because this pattern occurs so frequently, a larger percentage is not necessary. See Trading Tips for an explanation of this.

I used a reciprocal of the Fibonacci retrace to predict D. That excluded some of the ratios listed in the table, BCD row, because they are not reciprocals of the ABC retrace (meaning I excluded 314% and 224%).

ab=cd retraces
Bullish AB=CD Ratios
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Trading Tips

The following explains how to use the measure rule to predict point D. Why is this important? Because if you can identify a valid ABC turn, you can determine how far price will drop (to D). This method works 57% of the time, according to my tests but you can increase this to 65%.

Find the ABC retrace which obeys one of the Fibonacci ratios listed in the previous table. Because the CD leg is supposed to equal the length of the AB leg, if we know the length of AB, we can compute point D.

For example, if point A is at 35, B is at 25 and C is at 28.82. Point C retraces 38.2% of the AB move. The length of AB is 10. Subtract this from the high at C gives a target of 18.82.

This method works 57% of the time.

Boosting Measure Rule Accuracy

A more complicated approach is to use Fibonacci ratios to determine D. Refer to the chart on the right.

Take the reciprocal of the ABC retrace and multiply it by the length of leg CB. Subtract the result from the high price at C. The measure rule target provided by the calculation, if the pattern works, will be point D.

For example, say that the high at point A is 12, the low at B is 10, and the high at C is 10.98. Is point C close enough to a 50% retrace (that is, the closest Fibonacci number listed in the ABC row of the Identification Guidelines table)? A 50% retrace of the 10 to 12 move would be 11.

Missing this by one percentage point (for a retrace of 49% to 51%) would give a range of 10.98 to 11.02, so C would qualify as "close" to the 50% retrace value. I programmed my computer to use this 1% window to qualify the turns. A larger window was unnecessary because too many patterns already met the guidelines.

Once you know the stock retraced 50% of the AB move, take the reciprocal of this (1/0.5 or 2) and multiply the CB leg by this value and subtract it from the high at C.

the measure rule for the bullish ab=cd
The Measure Rule

In this case, the CB leg is 10.98-10 or 0.98. Multiplying this by 2 gives 1.96 and subtracting 1.96 from the high at C gives 9.02. That value becomes the D target.

This method works the same as the prior one, 57% of the time.

You can increase the accuracy of the measure rule by using the next higher Fibonacci number in the formula to find point D.

In this example, instead of using 50%, use 61.8%. The multiplication number would change from 2 (1/0.5) to 1.618 (1/0.618). So we have 0.98 * 1.618 or 1.59. Subtract that value from the high at C (10.98) gives 9.39, closer than the prior method's 9.02. This projection method works 65% of the time.

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The AB=CD pattern

Is the Bullish AB=CD Really Bullish?

The traditional measure I use to determine whether a chart patterns is bullish or bearish is to determine the breakout direction.

A close above the top of the pattern (above point A, refer to the image on the right) means an upward breakout. A close below the bottom of the pattern (below point D) means a downward breakout. Using this measure, I found that 56% of bullish AB=CD patterns breakout upward. That means the pattern is bullish.

An upward breakout occurs despite price ending the pattern at the low (D).

Also, the upward breakout after price has been stair-stepping lower means this pattern acts as a reversal of the downward trend.

Example

An example AB=CD pattern

The above chart shows a bullish AB=CD pattern on the daily scale.

Price peaks at A at 49.82, drops to B at 45.37 and retraces to C at 49.29. The ABC retrace measures (49.29-45.37)/(49.82-45.37) or 88%, close to the 88.6% retrace from the Identification Guidelines table.

D has a low of 43.40, although the next day price makes a lower low.

Does D reach the predicted measure rule target? Let's find out.

The AB drop is 49.82-45.37 or 4.45. Subtracting this from C gives 44.84. So, D is below the target. In other words, the ABC move correctly predicted point D.

Although the stock made a lower low the next day, it has moved higher, reluctantly it seems, to a high of 52.43 on May 1, 2018 before moving lower again.

-- Thomas Bulkowski

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See Also

AB=CD is a registered trademark of Scott Carney.

 

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