Bamm Theory: Bullish BAMM Magnet

BAMM = BAT ACTION MAGNET MOVE

BAMM is an abbreviation for Bat Action Magnet Move. The essence of this theory is based upon the primary tenet of Harmonic Trading that not all patterns are the same, as specific “technical entities” in the form of harmonic patterns define unique trading situations. In Harmonic Trading: Volume One, I discussed “The Great Gartley Controversy,” which explains the importance of exact alignments of Fibonacci ratios with respect to price structures. My differentiation of similar pattern structures led me to discover the importance of respecting exact alignments. Specifically, the Bat pattern, which requires a different alignment of Fibonacci ratios than the general Gartley pattern, consistently guided my trade executions at different price levels. In doing so, I was able to differentiate price structures and define the best trading opportunities.

The essence of this argument focuses primarily upon the location of the mid-point (B) within the pattern structure. In my interpretation of the Gartley, the mid-point is required to occur at a 0.618 retracement of the XA leg. I realized that any B point with a retracement less than a 0.618—specifically a 50% or less retracement—resulted in a completion point that was closer to the initial starting point at X. This variation became known as the Bat pattern.

With this understanding, I was able to differentiate various M- and W-type price structures and have a better understanding of the potential future direction of the price action. In the Bat structure, when the CD leg exceeded the B point, I was confident that the price action would test the 0.886 retracement of the XA leg. There were many times where I would identify this situation in advance, watch this phenomenon develop, and see the price action reach this target. As these situations became more apparent, it dawned on me to begin playing these moves by capturing the segment of the CD leg instead of waiting for the ultimate completion of the larger pattern. Like a magnet, the Potential Reversal Zone (PRZ) of the Bat pattern frequently provided clear direction of where the price action was headed. Hence, the BAMM— Bat Action Magnet Move—was born.

THE MAGNET EFFECT

One of the greatest experiences with the Harmonic Trading techniques is the first time that you identify a potential pattern, observe the price action, test the PRZ, and reverse precisely from that projected area. For many people, this type of experience is when the harmonic lightbulb turns on. I’ve received numerous e-mails from many people who describe this exact sequence of events. From that point forward, people tend to never look at the financial markets the same way again.

But, what is this experience? I remember when I first started to differentiate the various M- and W-type structures, I became excited the more I was able to differentiate various harmonic setups. In most cases, I was able to recognize these situations well in advance. For example, pattern developments in the various major indices in my advisory reports, especially the S&P 500, were identified months if not more than a year in advance. How was this possible? Time and time again, there were distinct harmonic patterns forming on many long- term charts that eventually came to fruition. As I tracked these situations, I realized in all patterns there was a distinct point where the potential completion of a harmonic pattern would be triggered. Regardless of the pattern, the price action frequently was drawn to the distinct harmonic zone. In my opinion, this technical phenomenon was defined by the relative structure of the overall price action as it entered the final CD leg of the pattern.

Although this phenomenon did not occur in every situation, a majority of these circumstances where distinct harmonic patterns would develop, enter into the final CD leg, and ultimately test all of the numbers in the PRZ. Regardless of whether the pattern completion was valid, the zone from the point the CD leg is triggered until it tests the completion point of the pattern continually presented a fantastic trading opportunity to capitalize on the predominant trend and the magnet effect of the harmonic price action.

HARMONIC BREAKOUTS AND BREAKDOWNS  

I soon realized that these situations were unique technical breakouts and breakdowns that were defined by their relative harmonic ratio alignments. In the same fashion as harmonic patterns, these structures possessed precise technical conditions to define these unique situations. Also, these specific harmonic breakouts or breakdowns enabled me to develop pattern-specific rules for each trading opportunity. After refining the details for these setups, the execution and the management of these trades became easier to handle.

Depending upon the ratio alignment, the trigger of the final leg of the structure occurs when the price action of the CD segment exceeds the prior B point. Whether the price action is a breakout or a breakdown, the extent of this move can be projected with a large degree of certainty as long as the entire structure satisfies all of the necessary elements to validate the pattern. This classification creates a unique technical situation that requires many conditions to be valid before triggering a potential trade opportunity. Furthermore, these breakout and breakdown strategies attempt to capture a small segment of the price action relative to the larger pattern. Unlike many general technical strategies that attempt to capitalize on breakouts and breakdowns, this approach employs the advanced pattern identification techniques to differentiate these situations as unique. It is important to realize that these are special breakout and breakdown trading strategies that rely on many technical conditions to be present to validate the opportunity. Therefore, the technical considerations and price parameters are precisely defined, providing a more detailed framework to assess the trade opportunity.

As I mentioned previously, within the context of Harmonic Trading, the Bat pattern possessed these technical traits more clearly than any other setup. Time and time again, I was able to differentiate Bat versus Gartley patterns well in advance. As soon as the CD leg exceeded the B point, the final segment represented a fantastic opportunity to capitalize on the predominant trend—at least capturing the segment to the pattern’s completion point. Of course, the Bat presented a larger zone, as the CD leg extended further beyond the B point, which was typically a 50% retracement or less, in this pattern and completed at the 0.886. Unlike the Gartley pattern, which utilized a 0.618 retracement and offered a smaller zone between the B point and the D point, the Bat became a reliable structure to employ these strategies. Hence, BAMM—Bat Action Magnet Move—best described this technical phenomenon. Harmonic breakout or breakdown might be a more appropriate technical term to describe this type of price action. However, the entire concept is encompassed within the dynamics of the Bat pattern.  

BULLISH BAMM BREAKOUT

The illustration of the Bearish Bat pattern in Figure 5.1 shows the point where the BAMM is triggered. Utilizing the Bat pattern illustration, when the 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 5.1

In the case of the Bearish Bat pattern, when the price action exceeds the B point in a breakout move, the segment of the CD leg typically extends toward the 0.886 retracement, which is usually complemented by other harmonic measurements. As a side note, it is important to point out that the Bearish Bat is utilized in the Bullish BAMM because the opportunity to get long on the breakout of the B point is striving to capture the segment to 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.

STANDARD & POOR’S 500 CONTINUOUS CONTRACT (ES_#F): DAILY BULLISH BAMM BREAKOUT

In May 2006, the continuous mini-contract of the S&P 500 formed a distinct Bearish Bat pattern that was triggered when the CD leg exceeded the prior B point on its way to test all of the numbers in the PRZ (see Figure 5.2).

FIGURE 5.2

As the index rallied above the B point resistance, the price action triggered the BAMM, as the index decidedly rallied 40 points to close this gap. Clearly, the predominant trend of the daily action dictated the short-term bullish bias until the pattern was completed. Any intra-day trades during this time should have favored the long side until the BAMM completed. In this case, the larger daily trend clearly defined the short-term upside within the constraints of the pattern. This daily scenario clearly illustrates the BAMM concept and the ability of these “magnet moves” to decipher price action and define trading opportunities.

BULLISH BAMM BREAKOUT IN THE CD LEG

The BAMM phenomenon can be clearly witnessed upon close inspection of the CD leg. As the price action rallies above the B point, the “magnet effect” begins (see Figure 5.3).

FIGURE 5.3

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 exhibit decisive continuation. If not, it is best to cover those positions that tend to stall after the BAMM is triggered.

STANDARD & POOR’S 500 CONTINUOUS CONTRACT (ES_#F): DAILY BULLISH BAMM BREAKOUT IN THE CD LEG

The enlarged chart in Figure 5.4 shows the price action in the CD leg of the Bearish Bat that exemplifies the ideal bullish continuation necessary to validate these trading opportunities. In this case, the ES rallied sharply on the harmonic breakout above the prior B point and proceeded to test the PRZ in a direct “magnet move.”

FIGURE 5.4

Although the ES experienced a few down days along the way, the price action climbed steadily in this BAMM zone until all of the numbers in the pattern’s PRZ were tested. This BAMM breakout defined a precise 40-point zone that was “under the magnet effect of the pattern.” This clearly identified a bullish bias in this area until the pattern was completed. 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.