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ABC Patterns - A Short Lesson

 ABC Up and Down Patterns

What is an ABC pattern? What are the rules regarding these up and down patterns and what are the implications?

ABC patterns can be either bullish or bearish. There are certain rules that apply to them and a rich history behind them as well. They appear everywhere in the charts and have numerous variation, but the basic pattern is very simple: AB=CD as described herein.

History

The history behind the AB=CD pattern is interesting. In 1935, H.M. Gartley published a book with a list price of $1500 (a virtual fortune at the time) which described - apparently for the first time - the AB=CD pattern. This is the same pattern that is commonly known now as the ABC pattern1 in todays literature2. Later technicians expanded on this work and in 1976, Charles Lindsay put a formula with it that gave him the completion target for the pattern at D. Essentially D is the length of A to B leg added to the wherever the C point ends up.

ABC Pattern Defined

The basic definition of the ABC pattern that TA Today adheres to is the following:

  1. A price move up followed by a retrace down in a bull market - down and then up in a bear market. The initial up or down thrust can be viewed as a reasonably straight line and is denoted by the letters A (at the origination point) and B (at the completion point).
  2. Once the initial thrust completes, a retrace occurs. For the pattern to hold significance (be tradable), the retrace must measure no more than a .618 Fibonacci retrace of the A to B leg of the move. Usually the smaller the retrace, the stronger the move.
  3. One the retrace completes and the price trend resumes in the same direction of the A to B leg of the move, the C to D leg of the pattern unfolds.
    1. For the ABC pattern to hold significance, when prices race past the B point of the move, volume must increase to a greater amount than previously traded a the B swing point
    2. If volume does expand, then the C to D leg typically equals a Fibonacci ratio of the A to B leg of the corresponding move (1, 1.272, 1.50, 1.618, and even as much as 2).
  4. The slope of the move from A to B is not necessarily the same as that of C to D. This implies that the time frame can be different.

What Signals a Failure?

Typically, once prices pass the B point of a valid ABC pattern and do so with volume, the pattern should hold true an extend to create the C to D leg of the pattern. If prices fall back below the low of the bar that defines the B point and close there, the pattern is suspect and one should reduce or eliminate exposure to the trade.

1 Pesavento, Larry and Jouflas, Leslie - Trade What You See - How to Profit from Pattern Recognition, John Wiley & Sons, 2007, page 37.

2 Note that the definitions provided here may differ slightly from what is printed elsewhere as they are representative of the experience L.A. Little has in gained in trading this pattern over the years.