Bamm Theory: Bearish BAMM Magnet

BEARISH BAMM BREAKDOWN

Figure 5.5 illustrates a Bullish Bat pattern that outlines the point where the BAMM is triggered. Utilizing the Bat pattern illustration, when a B point of a pattern is at a 50% level or less, the CD leg typically experiences a greater retracement of the XA move to the 0.886 level.

FIGURE 5.5

In the case of the Bullish Bat pattern, when the price action exceeds the B point in a breakdown move, the segment of the CD leg typically extends toward the 0.886 retracement. The 0.886 retracement is usually complemented by other harmonic measurements that help define the immediate PRZ. Again, it is important to point out that the Bullish Bat is utilized in the Bearish BAMM. The opportunity to sell on the breakdown of the B point is striving to capture the final segment that represents the completion of the pattern at the 0.886 retracement. Also, it is important to note that this technique typically employs shorter-term trading strategies within the context of a longer-term pattern. The ultimate goal is to capitalize on those smaller yet higher-probability price moves within the completion of a much larger pattern.

EURODOLLAR (EUR_A0-FX): WEEKLY

BEARISH BAMM BREAKDOWN

For more than a year, the Euro formed this distinct Bullish Bat that started to break down sharply after violating the prior B point (see Figure 5.6). The BAMM was triggered when the CD leg exceeded the prior B point at 1.2750 on its way to test all of the numbers in the PRZ.

FIGURE 5.6

As the Euro broke down under the B point support, the price action triggered the BAMM. The index fell another 700 pips to close this gap and test the PRZ. Clearly, the predominant trend of the daily action dictated the short-term bearish bias until the pattern was completed. Any trades—intra-day or daily swing positions—during this time should have favored the short side until the BAMM completed. In this case, the larger weekly trend defined the short-term downside within the constraints of the pattern. This long-term weekly scenario clearly illustrates the BAMM concept, and the ability of these “magnet moves” to decipher price action and to define trading opportunities.

BEARISH BAMM BREAKDOWN IN THE CD LEG

The BAMM phenomenon can be clearly witnessed upon close inspection of the CD leg. As the price action declines below the B point, the “magnet effect” begins, as illustrated in Figure 5.7.

FIGURE 5.7

The most important technical aspect of this breakdown is the clear continuation to the downside after the price action exceeds the B point. The breakdown should continue convincingly until it tests the PRZ. Although not all price action declines straight to the completion point of the pattern, the most valid situations will exhibit decisive continuation. If not, it is best to cover those positions that tend to stall after the BAMM is triggered.

EURODOLLAR (EUR_A0-FX): WEEKLY

BEARISH BAMM BREAKDOWN IN THE CD LEG

The chart in Figure 5.8 shows the price action in the CD leg of the Bullish Bat.

FIGURE 5.8

This chart shows the ideal continuation to the downside necessary to validate these trading opportunities. In this case, the Euro sank sharply on the breakdown below the prior B point at 1.2750.

The Euro exhibited the ideal price action in this example, and it clearly illustrates the “magnet effect” of the BAMM concept. In the case of the Euro, it sold off sharply through this BAMM zone until all of the numbers in the pattern’s PRZ were tested. This BAMM breakdown defined a substantial 750-pip zone that was “under the magnet effect of the pattern” and accurately identified the predominant bearish bias until the pattern was completed. Again, technical information like this can immensely improve trading results, as the understanding of such harmonic phenomena will consistently identify the predominant market bias and identify those trades that seek to benefit from the established trend.

AB=CD BAMM

As outlined previously, the CD leg is the most powerful price segment that possesses substantial implications for trading opportunities within the BAMM framework. When analyzing the completion of an AB=CD pattern, the determination of the pattern’s completion point cannot be assessed until the CD leg has violated the B point of the structure. Although this may not seem to be that significant of a technical phenomenon on smaller patterns, larger patterns in price and time can offer tremendous opportunities to execute trades within this AB=CD BAMM window with the profit objective clearly defined by the PRZ. Although the AB=CD BAMM technical phenomenon might be more appropriately called AB=CD Magnet Move or AB=CD MM, the principles embodied within the BAMM theory best describe the entire concept. Hence, the term is AB=CD BAMM.

In much the same manner that the BAMM principles apply to the Bat pattern when the mid-point retracement level is exceeded, the AB=CD BAMM capitalizes on the “harmonic breakout/breakdown” in distinct structures. Once the price action exceeds the B point, the segment of the CD leg typically extends toward the completion point of the pattern. The BC projection usually complements the setup, as the exact completion point of the pattern is most important in this situation.

As a side note, it is important to point out that the Bearish AB=CD is utilized in the Bullish BAMM because the opportunity to get long on the breakout of the prior B point is striving to capture the remaining CD segment to the completion of the pattern. The inverse is true for the Bearish BAMM. Also, it is important to note that this technique typically employs shorter-term trading strategies within the context of a longer-term pattern.

Again, the ultimate goal is to capitalize on those smaller yet high-probability price moves within the completion of a much larger pattern. Therefore, the point at which the CD leg exceeds the prior B point provides a gap that represents a highly probable area of acceleration. Like a magnet, the price action is pulled toward the completion point of the larger AB=CD pattern. Although complex harmonic patterns provide even greater confirmation of the completion of the structure, the important focus is on the area where the CD leg exceeds the prior B point to the completion zone.

BULLISH AB=CD BAMM

In the case of the Bearish AB=CD pattern, the price action will typically accelerate on the breakout of the resistance level at the B-point, as illustrated in Figure 5.9.

FIGURE 5.9

The most important technical aspect of this breakout is the clear continuation to the upside after the price action exceeds the B point. The breakout should continue convincingly until it tests the PRZ. Although not all price action rallies straight to the completion point of the pattern, the most valid situations will exhibit decisive continuation. If not, it is best to cover those positions that tend to stall after the AB=CD BAMM is triggered.

HOME DEPOT (HD): DAILY

BULLISH AB=CD BAMM

The weekly chart in Figure 5.10 shows a distinct Bearish AB=CD pattern that formed over the course of six months. The structure rallied above the prior B point and accelerated to the completion point of the pattern.

FIGURE 5.10

It is important to underscore the degree of confidence in the overall trend bias that these situations instill. Although this technical understanding does not dismiss effective trade management strategies to capitalize on these potential opportunities, the BAMM phenomenon offers a great deal of evidence about the state of the predominant trend and a reliable completion target for the price move. Defining these price constraints based from the BAMM conditions instills a great deal of confidence in the position, as all parameters are outlined in advance. In essence, these high-probability BAMM zones create tradable “windows” of price segments.

HOME DEPOT (HD): WEEKLY

BULLISH AB=CD BAMM BREAKOUT IN THE CD LEG

The enlarged chart in Figure 5.11 shows the weekly price action in the CD leg of the Bearish AB=CD. This chart shows the ideal upside continuation necessary to validate these harmonic breakout trading opportunities. In this case, Home Depot rallied decisively as it broke above the prior B point resistance just above $38.

FIGURE 5.11

Although a 3-point breakout might not seem like a big deal, the true beauty of this concept is the understanding of the “magnet effect” of the price action as it completes the pattern and the high probability bias that this technical phenomenon engenders. In this case, the “harmonic breakout” on the weekly chart confirmed that the predominant trend would continue to the completion point of the pattern. Situations such as these create a reliable bias of the primary trend, which can optimize trading decisions by staying on the right side of the market.

BEARISH AB=CD BAMM

In the case of the Bullish AB=CD, the price action will typically accelerate on the breakdown of the support level at the prior B-point, triggering a trade opportunity to sell on this continuation with a target completion at the pattern’s PRZ (see Figure 5.12).

FIGURE 5.12

After the B point is violated, the trend should continue decidedly lower toward the completion of the pattern. Although the price action may not decline straight to the PRZ, the overall trend should maintain a steady descent to the harmonic numbers.

DISNEY (DIS): DAILY

BULLISH AB=CD BAMM

The daily chart in Figure 5.13 shows the distinct AB=CD pattern that formed over the course of nine months. The structure broke down under the prior B point and accelerated to the completion point of the pattern.

 

FIGURE 5.13

Although the price action bounced about halfway to the ultimate completion of the pattern, the eventual bearish continuation and overall negative bias dictated the predominant trend until the harmonic support was tested.

DISNEY (DIS): DAILY

BULLISH AB=CD BAMM

The enlarged chart in Figure 5.14 shows the price action in the CD leg of the Bullish AB=CD and the ideal continuation to the downside necessary to validate this trading opportunity. In the case of Disney, the stock accelerated to the downside after violating the B point.

FIGURE 5.14

The AB=CD BAMM is most effective when utilizing larger time frames to define the bias for a shorter-term move. In the case of Disney, the daily downtrend after the BAMM was triggered would have indicated that the predominant bearish bias would be maintained until the pattern was completed at a minimum. Therefore, the BAMM trigger would have dictated short positions at this time until the harmonic support was tested.

BAMM CONCLUSION

There are many situations where distinct structures seem to indicate their completion long before the reality. The ability to recognize harmonic price action within distinct structures is one of the greatest advantages of this methodology. Although not all harmonic patterns complete as expected, there are an overwhelming number of situations where this phenomenon reveals a great deal about the future potential price action well in advance.

There are many types of BAMM or “magnet move” phenomena that occur within many of the structures of harmonic patterns. The BAMM and AB=CD BAMM are two examples of special technical situations where the potential completion of a particular pattern is first recognized and effective strategies can be employed to capitalize on obvious harmonic price action. Other types of BAMM phenomena—such as “morphing” situations—can materialize where failed retracement patterns evolve into extension patterns. For example, there are many situations where a failed Bearish Bat turns into a Bearish Crab. Although these situations are not as precise as the BAMM and AB=CD BAMM, they represent another type of phenomenon that involves the acceleration of price action from one harmonic level to the next. Again, it is within these “windows of harmonic levels of support and resistance” where a great deal of technical information can be garnered and high-probability trade opportunities defined.