ABCs Come in All Sizes
Last Thursday I pointed out a trade using the A-B-C Fibonacci pattern. Yesterday the market repeated that action. These patterns occur in all timeframes, and often you will see patterns inside of patterns inside of patterns. In today’s 15 minute chart you can see three levels of A-B-C.
The basic pattern consists of a move (A), a retracement (B), and a continuation (C) that usually stops at either 62%, 100%, or 162% of the original move. My interpretation of what is likely to happen after the A-B-C completes is based on which level turns the market.
If wave “C” is only 62% of “A” the market move was not very strong, and a good reversal is likely. If wave “C” turns at 100% of “A”, the market is in balance. But if wave “C” is 162% or larger, there is a good chance that the entire move is not over.
Today’s chart shows three A-B-C patterns, all starting at the top marked with the multiple “X” symbols. The pattern in blue was yesterday, as price broke downward from a long rectangle. The pullback into the close became the “B” wave of a larger pattern (yellow.)
If including a gap in the middle of a pattern makes it hard to follow, consider doing as I do — consult a chart that includes the trading outside of market hours. You’ll find that there really isn’t a gap — trading occurred during that empty area. It just happened between 4:15pm and 9:30am (Eastern time), so it doesn’t show on “regular” charts.
The yellow wave “C” didn’t stop at 100%, so there was a warning that more downside action was a strong possibility. And that brings us to the green wave “B”, which on a 3 minute chart contained a very small a-b-c, with “c” stopping at 62%. If you saw the larger pattern, that created a potential entry for the afternoon drop. If not, there was a downside triangle that could have been used for the short sale.
Where are we now? The large green A-B-C pattern has just reached the 100% mark. That does NOT necessarily mean we will bounce on tomorrow’s open. You can’t classify an A-B-C pattern until a pivot has occurred. But the market has been struggling for the last two weeks, and with the severity of today’s drop my assumption is we are finally seeing a long overdue correction.
