As of 10/20/2020
  Indus: 28,309 +113.37 +0.4%  
  Trans: 11,860 +152.21 +1.3%  
  Utils: 881 +3.55 +0.4%  
  Nasdaq: 11,516 +37.61 +0.3%  
  S&P 500: 3,443 +16.20 +0.5%  
YTD
-0.8%  
 +8.8%  
 +0.2%  
 +28.4%  
 +6.6%  
  Targets    Overview: 09/29/2020  
  Up arrow29,300 or 27,400 by 11/01/2020
  Up arrow12,000 or 11,000 by 11/01/2020
  Up arrow915 or 840 by 11/01/2020
  Up arrow12,800 or 11,300 by 11/01/2020
  Up arrow3,700 or 3,400 by 11/01/2020
CPI (updated daily): Arrows on 10/19/20
As of 10/20/2020
  Indus: 28,309 +113.37 +0.4%  
  Trans: 11,860 +152.21 +1.3%  
  Utils: 881 +3.55 +0.4%  
  Nasdaq: 11,516 +37.61 +0.3%  
  S&P 500: 3,443 +16.20 +0.5%  
YTD
-0.8%  
 +8.8%  
 +0.2%  
 +28.4%  
 +6.6%  
  Targets    Overview: 09/29/2020  
  Up arrow29,300 or 27,400 by 11/01/2020
  Up arrow12,000 or 11,000 by 11/01/2020
  Up arrow915 or 840 by 11/01/2020
  Up arrow12,800 or 11,300 by 11/01/2020
  Up arrow3,700 or 3,400 by 11/01/2020
CPI (updated daily): Arrows on 10/19/20

Bulkowski on the Bullish AB=CD®

 

Initial release: 6/22/2018. Statistics updated 8/28/2020.

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 idea about this pattern is once you know the first three points, you can calculate the fourth. Price reaches or exceeds the calculated point D 100% of the time. However, the stock is supposed to turn upward at D and that only happens 38% of the time.

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

The AB=CD pattern
Bullish AB=CD

 

Important Bull Market Results

Overall performance rank for up moves (1 is best): 4 out of 5 (versus the other Fibonacci patterns only)
Break even failure rate: 12%
Average rise: *38%
Percentage meeting predicted price target (point D): 100%

The above numbers are based on at least 1,741 perfect trades. See the glossary for definitions.

* As measured from the valley at point D.

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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

After reaching point D and turning upward, price rises to A 40% of the time, to B 83% of the time, and to the price of C 47% 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 drop (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 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.

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.

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.

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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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