A-B-C Patterns
Today was filled with one of my favorite Fibonacci sequences; what I call the A-B-C pattern. It’s an Elliott corrective pattern, but you certainly don’t have to understand any wave counts to use it. Just call it an Up-Down-Up or the reverse.
These patterns will often end in a tradable Fibonacci measurement, and if you can combine them with some other type of signal or trigger they are often successful.
We started with a small gap down and, although I intentionally didn’t mention it yesterday (no predictions!) I really expected a bounce from the 790 area. When it tried several times in the first 25 minutes and kept failing, the blue 13 minute moving average gave a “safe” short sale entry. Remember, for me a safe entry is when I can place a very close emergency exit — often just above that moving average.
And where did we stop? At a nice Fibonacci cluster formed from measurements on a 15 minute chart. One is a retracement of yesterday’s rally (in white) and the other is an A-B-C measurement starting from the top of the rally that began on January 9th. It was the Down-Up-Down pattern.
To get a target for an A-B-C, you take the distance traveled by “A” and multiply it by Fibonacci ratios — in this case 0.618, 1.0, 1.618, and 2.618. These measurement are added to (or subtracted from) the next pivot, called point “B.” The key is that you do not take action at these levels unless there is another reason for the trade! Sometimes this “other reason” can be other Fibonacci measurements that call for the same level — marking a Fibonacci cluster.
I prefer (but don’t always require) these trades to have one more factor; a divergence with some type of oscillator. As usual, I show a standard Stochastic oscillator on these charts, and the yellow lines indicate divergences with price. In this case it made a very nice exit. More aggressive traders may have also used it as a long entry.
The move back up is also marked with an A-B-C in blue. When price turns at the first Fibonacci measurement (0.618) it gives me added assurance that the move was only a correction in a continuing trend. That makes another short sale appropriate after the blue “C.” After the trade becomes profitable, the question is where to expect a reversal in order to take profits.
I’ve marked two potential A-B-C patterns for this last move — one in green and one in red. Which one do you chose? Since I was calling the mid-day pullback a correction in a continuing down move I expected a new low, and by the time we got there both patterns had formed. When in doubt, draw them both in. The final bottom was pointed to by both measurements — and we got a divergence there for the final exit.
There were actually other Fib measurements pointing to this last bottom, but the A-B-C patterns were very clear today. Any time you have an Up-Down (or a Down-Up) move, draw in the targets for point “C” and watch what happens there. I think you’ll be happy with the results.
