Bearish AB=CD

As of 12/02/2024

Indus: 44,782 -128.65 -0.3%

Trans: 17,545 -73.73 -0.4%

Utils: 1,057 -21.90 -2.0%

Nasdaq: 19,404 +185.78 +1.0%

S&P 500: 6,047 +14.77 +0.2%

YTD

+18.8%

+10.4%

+19.9%

+29.3%

+26.8%

Targets Overview: 12/02/2024

44,000 or 46,000 by 12/15/2024

17,025 or 18,000 by 12/15/2024

1,025 or 1,100 by 12/15/2024

20,000 or 18,500 by 12/15/2024

6,200 or 5,900 by 12/15/2024

Chart Pattern Indicator:

on 11/20/24

As of 12/02/2024

Indus: 44,782 -128.65 -0.3%

Trans: 17,545 -73.73 -0.4%

Utils: 1,057 -21.90 -2.0%

Nasdaq: 19,404 +185.78 +1.0%

S&P 500: 6,047 +14.77 +0.2%

YTD

+18.8%

+10.4%

+19.9%

+29.3%

+26.8%

Targets Overview: 12/02/2024

44,000 or 46,000 by 12/15/2024

17,025 or 18,000 by 12/15/2024

1,025 or 1,100 by 12/15/2024

20,000 or 18,500 by 12/15/2024

6,200 or 5,900 by 12/15/2024

Chart Pattern Indicator:

on 11/20/24

Bulkowski on the Bearish AB=CD®

Overview

This article describes my analysis of the bearish 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 bearish AB=CD is a measured move up chart pattern except that the turns are located using Fibonacci ratios. The idea behind this pattern is that once you know the first three points, you can calculate point D. Price reaches point D 95% of the time in a bull market. However, the stock is supposed to turn down at D. It does, but only\ 32% of the time. In other words, price continues rising 68% of the time.

Important Bull Market Results

The above numbers are based on 2,649 perfect trades. See the glossary for definitions.

Identification Guidelines

Characteristic	Discussion
Peaks/Valleys	The peaks and valleys in the pattern need not be consecutive. This is not a guideline, but an observation.
ABC	Price climbs from valley A to peak B then retraces to valley C. Retrace BC as a percentage of BA should be one of the following Fibonacci ratios: 38.2%, 50%, 61.8%, 70.7%, 78.6% or 88.6%.
BCD	After peaking at B, price drops to C followed by an extension to D. The DC/BC 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.

Testing 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%).

Bearish AB=CD Ratios

Trading Tips

After reaching point D and turning downward, price drops to A 24% of the time, to B 76% of the time, and to the price of C 35% of the time. You can use those as targets.

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 rise (to D).

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 leg AB, if we know the length of AB, we can compute point D.

For example, if point A is at 25, B is at 35 and C is at 28.82. Point C retraces 61.8% of the AB move. The length of AB is 10. Add this to the low at C gives a target of 38.82.

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 the BC leg. Add the result to the low price at C. The measure rule target provided by the calculation, if the pattern works, will be point D.

For example, say the low at point A is 10, the high at B is 12, and the low 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 that the stock retraced 50% of the AB move, take the reciprocal of this (1/0.5 or 2) and multiply the BC leg by this value and add it to the low at C.

The Measure Rule

In this case, the BC leg is 12-10.98 or 1.02. Multiplying this by 2 gives 2.04 and adding it to the low at C gives 13.02. That value becomes the D target.

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 1.02 * 1.618 or 1.65. Add that value to the low at C (10.98) gives 12.63, closer than the prior method's 13.02.

Example

Point A has a low price of 10.23. B has a high of 11.32. And C has a low of 10.65. Does this qualify as a potential bearish AB=CD pattern?

Let's find out. The BC/BA retrace is (11.32-10.65)/(11.32-10.23) or 61.5%, which is close (within one percentage point) to the target ratio of 61.8%

So it's a valid pattern. What is the predicted price of D, which is to say, how far will price rise?

If the pattern works as it's supposed to, the stock will peak at 11.73. How do I know? Let's go through the calculation.

The reciprocal of the ABC retrace is 1/0.618 or 1.618. Multiply this by the BC leg and add it to the low at C. We get (11.32-10.65)*1.618 + 10.65 = 11.73

A simpler approach is to compute the length of the AB leg and add it to the low at C. We have 11.32-10.23 = 1.09. Add 1.09 to the low at C gives 1.09+10.65=11.74. The differences between the two methods are because of round off.

In this case, the stock reached the target but look what happened. Price kept rising. Oops. As I mentioned, my tests showed price continuing rising past D the vast majority of the time, and this is an example.