Bearish RSI BAMM: Bearish Butterfly, Bearish BAT

PATTERN COMPLETION AT THE 1.13–1.618 RSI BAMM EXTENSION AREA

Although the position of the RSI BAMM Trigger Bar in relation to the prior high defines the execution area of the completion of the RSI BAMM, the formation of distinct harmonic patterns during this final divergence stage is the defining confirmation signal for the execution of the trade. The pattern’s PRZ combined with the RSI BAMM extension provides significantly more accurate technical evidence of a probable reversal at hand. Although the execution of the trade is more dependent upon the completion of the pattern, the RSI BAMM extension is a critical minimum technical level that must be tested. Most importantly, the key to this final phase is to be patient and wait for distinct patterns to develop in these areas.

BEARISH BUTTERFLY AT 1.13 RSI BAMM CONFIRMATION POINT

One of the most common patterns associated with a 1.13 RSI BAMM Confirmation Point extension is a Bearish Butterfly (see Figure 6.67). Typically, the RSI BAMM Trigger Bar will indicate a 1.13 extension, while the price action forms a distinct Bearish Butterfly, indicating that the potential reversal will occur at the 1.27 extension.

FIGURE 6.67

Although this may create some confusion, it is important to remember that the pattern completion point represents the most critical price level in this area. This underscores the importance of the PRZ within the RSI BAMM limits (1.13–1.618) as the most critical price area for the ultimate execution of the trade.

BRITISH POUND/USD (GBP_A0-FX): WEEKLY

BEARISH BUTTERFLY AT 1.13 RSI BAMM CONFIRMATION POINT

Referring back to our weekly example of the British Pound, the Bearish Butterfly clearly complemented the RSI BAMM Confirmation Point. Although the 1.13 extension was slightly below the pattern’s PRZ, the combination of the Bearish Butterfly and the Bearish RSI BAMM defined critical long-term resistance in the 1.95–1.96 area on the weekly chart.       

The chart in Figure 6.68 shows the indicator and price action that possesses a distinct bearish harmonic pattern at the RSI BAMM Confirmation Point.

FIGURE 6.68

BRITISH POUND/USD (GBP_A0-FX): WEEKLY

BEARISH BUTTERFLY POTENTIAL REVERSAL ZONE (PRZ) AT 1.13 RSI BAMM CONFIRMATION POINT

The enlarged chart in Figure 6.69 of the British Pound shows the PRZ of the weekly Bearish Butterfly at the 1.13 RSI BAMM Confirmation Point.

FIGURE 6.69

Clearly, the PRZ of the pattern with the RSI BAMM Confirmation Bar identified critical long- term resistance, as the British Pound reversed sharply in the weeks following the completion of the setup.

ALTERNATE BEARISH BAT AT 1.13 RSI BAMM CONFIRMATION POINT

Although a Bearish Butterfly possesses powerful harmonic implications at the 1.13 RSI BAMM Confirmation Point extension, there are many instances where an Alternate Bat Pattern may be the only structure forming at the completion of the setup (see Figure 6.70).

 

FIGURE 6.70

In the case of the Alternate Bat, the completion of the setup will typically reverse very close to the 1.13 extension. It is important to focus on this extension level and the RSI Confirmation Point for an indication that the reversal has completed. As long as the other elements of the RSI BAMM and the pattern alignment complete in the same area, the trade execution at the 1.13 extension is valid.

On a side note, you may be wondering about other retracement patterns like the Gartley or the Bat that may form in conjunction with a 1.13 extension. Although these patterns will typically complete before the 1.13 extension, the position of their RSI BAMM Trigger Bar will typically be 5 or more price bars from the prior high. I will show an example a bit later in this chapter. As for the Alternate Bat pattern, the Trigger Bar will typically be 3–4 price bars from the prior high.

STANDARD AND POOR’S 500 ETF (SPY): 5-MINUTE ALTERNATE BEARISH BAT AT RSI BAMM CONFIRMATION POINT

The chart of the SPY in Figure 6.71 shows a distinct RSI BAMM setup with a Bearish Alternate Bat converging at the Completion Point. The price action reversed sharply after testing the PRZ and the overbought 70 limit. The precise reversal and decisive continuation following the completion of the setup were clear signs of a valid reversal at hand.

FIGURE 6.71

Although the SPY reversed just shy of the 1.13 extension, the price action tested most of the PRZ at the same time it completed the impulsive retest at the RSI Completion Point. Again, the coordination of these technical events is the defining element of all valid reversals. When the completion of the pattern occurs simultaneously with the RSI retest, the reversal is likely to yield a significant move.

STANDARD AND POOR’S 500 ETF (SPY): 5-MINUTE ALTERNATE BEARISH BAT POTENTIAL REVERSAL ZONE (PRZ) AT RSI BAMM CONFIRMATION POINT

The enlarged chart in Figure 6.72 of the Alternate Bearish Bat PRZ at the RSI BAMM Confirmation Point reveals the ideal elements for a valid reversal. The price action stalled immediately in the PRZ and exemplified the model technical coordination between the completion of the pattern and the RSI BAMM.

FIGURE 6.72

The SPY “kissed” the 70 level on the RSI retest as the pattern completed. In addition, the overwhelming downside continuation following the completion of the setup helped to quickly confirm its validity.

PATTERN COMPLETION BEFORE 1.13–1.618 RSI BAMM EXTENSION AT CONFIRMATION POINT: BEARISH BAT

The Bearish Bat structure that completes at an RSI Confirmation Point offers a unique trade opportunity. The structure of the pattern is extremely important to distinguish the optimal execution for the trade. The price action will usually test the PRZ and the overbought extreme zone before an execution signal is generated. The impulsive retest will occur at the 0.886 retracement—not the minimum 1.13 RSI BAMM extension (see Figure 6.73).

FIGURE 6.73

Although the Trigger Bar high point resistance (dotted line) complements this area, the coordination of these two technical events is critical in determining the minor reactive moves from the major reversals.

STANDARD AND POOR’S 500 MARCH 2010 MINI-CONTRACT (ES_H0): 15-MINUTE

BEARISH BAT AT RSI BAMM EXTENSION

Figure 6.74 shows a Bearish Bat that completed in conjunction with the RSI BAMM Confirmation Point (see Figure 6.74). The interesting aspect of this situation was the slightly delayed test of the PRZ, as the price action tested the RSI BAMM Completion Point well before the ultimate reversal.

FIGURE 6.74

STANDARD AND POOR’S 500 MARCH 2010 MINI-CONTRACT (ES_H0): 15-MINUTE

BEARISH BAT POTENTIAL REVERSAL ZONE (PRZ) AT RSI BAMM CONFIRMATION POINT

Figure 6.75 shows an enlarged chart of the price action the PRZ. Although the RSI rolled over much earlier, this example underscores the need to coordinate the pattern completion with the indicator divergence. Also, this situation demonstrates that the RSI BAMM completion is a minimum technical signal and relies on the completion of the pattern to dictate when and where to execute the trade.

FIGURE 6.75

PATTERN COMPLETION BEFORE 1.13–1.618 RSI BAMM EXTENSION AT CONFIRMATION POINT: BEARISH GARTLEY

In the case of the Bearish Gartley, the structure of the pattern is extremely important. Although the PRZ is typically well below the minimum 1.13 RSI BAMM extension, this situation still relies on coordinating the completion of the pattern with the final impulsive indicator retest (see Figure 6.76).

FIGURE 6.76

Although the Trigger Bar high point resistance (dotted line) complements this area, the coordination of these two technical events is most critical in validating the best trade opportunities.

EURODOLLAR (EUR_A0-FX): 5-MINUTE

BEARISH GARTLEY AT RSI BAMM EXTENSION

In this example, the price action possessed a distinct bearish Gartley pattern that completed in conjunction with the RSI BAMM Confirmation Point (see Figure 6.77).

FIGURE 6.77

Although the Euro rallied sharply as it tested the PRZ, the price action stalled immediately after hitting the overbought 70 level at the RSI BAMM Confirmation Point.

EURODOLLAR (EUR_A0-FX): 5-MINUTE

BEARISH GARTLEY POTENTIAL REVERSAL ZONE (PRZ) AT RSI BAMM CONFIRMATION POINT

The price action the PRZ is illustrated particularly well on the enlarged chart in Figure 6.78. The arrow points to where the RSI BAMM Confirmation Point completed.

FIGURE 6.78

Both technical events of the pattern’s completion and the successful impulsive RSI retest occurred nearly on the same day. This situation exemplifies the type of coordination between the two approaches that yields the best trading opportunities.

PATTERN COMPLETION BEFORE 1.13–1.618 RSI BAMM EXTENSION AT CONFIRMATION AREA: BEARISH 5-0 PATTERN

The Bearish 5-0 pattern is probably the most difficult to incorporate with the RSI BAMM. This is due simply to the fact that the completion of the pattern occurs nowhere near the minimum 1.13 RSI BAMM extension (see Figure 6.79).

 

FIGURE 6.79

As is the case with all harmonic patterns in the RSI BAMM setup, coordination is the key. The best 5-0 patterns require a distinct price structure that must complete in tandem with the RSI BAMM Confirmation Point. It is important to focus on the completion of the impulsive RSI retest, as this will typically be the most significant signal within the PRZ of the pattern.

GOOGLE (GOOG): 15-MINUTE PATTERN COMPLETION BEFORE 1.13–1.618 RSI BAMM EXTENSION AT CONFIRMATION AREA: BEARISH 5-0 PATTERN

The intra-day chart of Google in Figure 6.80 shows a distinct Bearish 5-0 pattern that completed simultaneously with the RSI BAMM Confirmation Point. The successful reversal following the impulsive retest at the Confirmation Point was a definitive signal to confirm the execution of the short position in the PRZ of the 5-0 pattern.

FIGURE 6.80

Although the typical 1.13 or 1.618 extension does not factor into these situations, the coordination of the impulsive RSI retest and the completion of the pattern continually provides accurate signals and effectively filters the best setups. Therefore, the 5-0 relies on the coordination of the indicator readings and the price action more than any other pattern applied to the RSI BAMM approach.

1.618 EXTENSION AT RSI BAMM CONFIRMATION POINT

The general rule for the Confirmation Point extension must focus on the location of the Trigger Bar, as it relates to the extreme prior peak. If the RSI BAMM Trigger Bar is the high price bar, the 1.618 extension is utilized to quantify the execution area for the trade (see Figure 6.81).

FIGURE 6.81

The two patterns that are utilized in these situations are the Bearish Crab and the Deep Bearish Crab. The following case studies are fantastic examples of pattern completions within the final phase of the RSI BAMM that converge with a 1.618 Confirmation Point. Although the 1.618 extension is the most critical harmonic number in this setup, the PRZ of the pattern defines the exact price range to execute the trade but still relies on the coordination of the RSI BAMM Confirmation Point to optimize trading decisions.

BEARISH CRAB AT 1.618 RSI BAMM CONFIRMATION POINT

In the Bearish RSI BAMM, the general rule for the Confirmation Point extension must focus on the location of the Trigger Bar, as it relates to the extreme prior low. If the Bearish RSI BAMM Trigger Bar is the extreme high, the 1.618 extension is utilized to quantify the Confirmation Point and the execution area for the trade (see Figure 6.82).

FIGURE 6.82

Although other factors will be considered, the importance of the extreme high to signal a 1.618 RSI BAMM extension helps to define the ultimate execution point for the trade. Two patterns—the Bearish Crab and the Deep Bearish Crab—utilize the 1.618 extension. Regardless of which Crab defines the PRZ, the crucial technical event occurs when the price action tests this area at the same time it completes the RSI BAMM Confirmation Bar.

FAMILY DOLLAR (FDO): DAILY

BEARISH CRAB WITH BEARISH RSI BAMM

The daily chart of Family Dollar in Figure 6.83 shows a Bearish Crab that completed with a distinct Bearish RSI BAMM setup. Since the extreme prior high at the X point represented the Trigger Bar, the ultimate completion occurred at the 1.618 extension.

FIGURE 6.83

The stock reversed immediately after testing the 1.618 RSI BAMM Completion Point. The decisive downside continuation accelerated after the RSI impulsive retest reversed from the 70 level. Again, the coordination of the reversal in both the pattern and the RSI BAMM signaled a valid setup at hand.

DEEP BEARISH CRAB AT 1.618 RSI BAMM CONFIRMATION POINT

Similar to the 1.13 RSI BAMM extension, the 1.618 extension is dictated by the position of the Trigger Bar. In this case, a Trigger Bar that is the extreme prior high will result in a corresponding pattern that utilizes a 1.618 projection. Within the Harmonic Trading arsenal of patterns, this will usually manifest as a Crab or Deep Crab pattern.

The Deep Bearish Crab presents a unique situation at the RSI BAMM Completion Point (see Figure 6.84). The 1.618 extension is the defining level for both the completion of the pattern and the RSI BAMM. In these situations, the 1.618 extension becomes even more significant, and the price action should not exceed this resistance level. Furthermore, most valid reversals will occur quickly after this area has been tested.

FIGURE 6.84

BOEING (BA): DAILY
DEEP BEARISH CRAB WITH BEARISH RSI BAMM

The Boeing chart in Figure 6.85 shows the entire RSI BAMM and the distinct Bearish Crab that formed during the divergence phase of the RSI BAMM. Although there were other numbers in the PRZ to complement this harmonic resistance, the 1.618 extension was the defining technical level in the setup. The convergence of the completion of the pattern with the impulsive RSI retest marked a critical reversal for the stock on the daily chart.

FIGURE 6.85

Although the RSI BAMM Confirmation Point completed before the entire test of the PRZ, both methods indicated the distinct area where this trend would change. In addition, this example of Boeing truly shows how distinct harmonic patterns that form in the final phase of the RSI BAMM can pinpoint precise reversal zones.

BOEING (BA): DAILY
DEEP BEARISH CRAB POTENTIAL REVERSAL ZONE (PRZ) AT 1.618 RSI BAMM CONFIRMATION POINT

The enlarged chart in Figure 6.86 of the price action in the PRZ at the RSI BAMM Confirmation Point clearly shows how the uptrend stalled as it tested this area and rolled over shortly after completing the pattern.

FIGURE 6.86

On a side note, the impulsive RSI retest reading literally kissed the 70 limit and reversed. These situations may be difficult to assess because the RSI BAMM Confirmation Point typically involves a sharp and brief indicator test. Although these situations may be tricky, the PRZ of the pattern serves to indicate the optimal price level for the trade execution. Remember, both conditions of a pattern completion and a successful test of the Confirmation Point are required to validate the entire RSI BAMM setup.

RSI BAMM CONFIRMATION POINT—REVERSAL ACCELERATION TRIGGER

An additional technical trigger serves as a secondary confirmation. Although this final trigger does not develop in every situation, when present after the final test of the Confirmation Point, it typically represents an area of acceleration of the reversal.

BEARISH CONFIRMATION POINT—REVERSAL ACCELERATION TRIGGER

The important focus of this Acceleration Trigger is the impulsive test of the RSI in conjunction with the price action. The structure of the RSI reading is critical after it sinks below the 70 level, as it can offer an important technical trigger that marks the area where the reversal should begin to accelerate (see Figure 6.87).

FIGURE 6.87

Typically, the RSI reading forms a brief “corrective pause” before accelerating to the downside. This “corrective pause” usually occurs within a few price bars of the breakdown. The trigger is determined by the price bar that results in the (accelerated) breakdown of the indicator reading following the completion of the RSI BAMM Confirmation Point.

It is important to expect that the RSI trigger signal will develop before the price begins to move. Although the RSI trigger is a bit early, the RSI BAMM Acceleration Trigger marks the most critical area within the entire strategy. This price level marks where an acceleration of the reversal price action must occur at this point or shortly thereafter. After the reaction from the overbought area, the indicator reading of the final RSI BAMM Confirmation Point should accelerate decidedly following the impulsive test of this last phase. In particular, the structure of the RSI reading is critical after it sinks below the 70 level, as it must demonstrate a decisive continuation of the reversal trend. Specifically, an M-type formation following the impulsive RSI test at the Confirmation Point should serve as an acceleration level that marks the beginning of the new trend.

The magnified illustration of the Bearish RSI BAMM Confirmation Point in Figure 6.88 clearly shows the ideal indicator structure that serves as a definitive confirmation trigger. It is important to note that the ideal structure is more visibly seen in the RSI than the price. Sometimes, the initial pullback following a reversal from the RSI BAMM Confirmation Point may only be a one or two bearish price bar pause, but the internal action is weakening. Although waiting for this trigger may delay an execution, the extra confirmation does provide a reliable signal of a valid reversal at hand. Furthermore, this breakdown of the Acceleration Trigger prevents executions at invalid RSI BAMM Confirmation Points, where the impulsive test at the 70 level flounders and does not provide decisive reversal continuation.

FIGURE 6.88

In these situations, it is important to respond appropriately and exit the trade at a small loss or break even due to the fact that the price action languishes after completing the RSI BAMM Confirmation Point.

The price action should move quickly and decidedly after the Acceleration Trigger is confirmed. The price bar that completes the breakdown of the M-type structure in the RSI reading will typically mark the acceleration point of the new reversal trend. When this trigger materializes, it creates a “do-or-die” situation while possessing powerful price action signals. In fact, the Acceleration Trigger represents the most sophisticated technical setup within the entire Harmonic Trading approach.

GOOGLE (GOOG): 5-MINUTE
BEARISH 5-0 PATTERN POTENTIAL REVERSAL ZONE (PRZ) AT RSI BAMM CONFIRMATION POINT WITH ACCELERATION TRIGGER

Referring back to the example of the Bearish 5-0 pattern in Google in Figure 6.80, the stock reversed precisely after hitting the entire PRZ at the same time the RSI completed a successful impulsive retest of the overbought extreme limit above the 70 level (see Figure 6.89).

FIGURE 6.89

The Acceleration Bar completed an M-type structure after the indicator reading broke down under the 70 level. This extra signal effectively indicated the area where the reversal would accelerate. It is important to note that the combination of the measuring techniques of harmonic price patterns and the ability of the RSI BAMM to define divergent areas of price action present an advanced methodology of technical strategies that effectively optimizes trading decisions in an unprecedented fashion. In particular, the final phase of the RSI BAMM represents a powerful technical measuring technique in its own right. When harmonic patterns converge at the Confirmation Point of the RSI BAMM, the multitude of technical readings serves to generate a consensus reading of whether to execute the trade.

BEARISH RSI BAMM FAILURE—STOP LOSS CONSIDERATIONS 

After defining the entire range of the RSI BAMM and the harmonic pattern completion points, the only consideration beyond the execution is the stop loss limit. The stop loss is a combination of the RSI BAMM extension—typically beyond the 1.618—and the price limit of the pattern that corresponds with the setup. Again, this will also include the price levels that are defined by the larger relevant harmonic levels. From a purely RSI BAMM perspective, the key invalidation point truly occurs beyond the 1.618 extension of the final divergent move. The validation of the technical phenomenon becomes questionable beyond the 2.0 extension of the final move for either situation.

In the case of the 1.13 RSI BAMM extension, it should not experience price action beyond the 1.618 level. For the 1.618 RSI BAMM extension, the price action should not exceed the 2.0 projection. Again, these are more guidelines than strict rules, as the stop loss for each situation is dependent upon the pattern completion at the RSI BAMM Confirmation Point.

As is the case for harmonic pattern failures, price action that violates these price levels, especially on the first test, should raise a red flag that the primary trend is quite strong. Most important, the area defined by the pattern’s PRZ and the RSI BAMM Confirmation Point defines a “do or die” price level that does not leave much room for discretion.

From a purely RSI BAMM perspective, the stop loss point represents the area where the entire scenario fails. Although these general rules attempt to define reliable technical levels to discern potential RSI BAMM violations, each situation still requires an ability to assess price action relative to the conditions of the setup to optimize trading decisions. Sometimes, these can be tricky situations. However, these rules provide defined limits where the reversal must occur.

As a side note, I dedicate an entire chapter to pattern failures in Harmonic Trading: Volume One. I will not cover the specifics of these strategies in this material. However, these violations are important technical events within the Harmonic Trading approach. It is important to recognize the violation of these precise harmonic zones and how they typically exhibit decisive price action in the continuation of the predominant trend.

INTERCONTINENTAL EXCHANGE (ICE): 5-MINUTE
BEARISH ALTERNATE BAT AND RSI BAMM FAILURE

The Intercontinental Exchange (ICE) example in Figure 6.90 shows a distinct Bearish RSI BAMM setup on the 5-minute chart. Despite the ideal conditions, the stock rallied sharply above the RSI BAMM Confirmation Point. In fact, the impulsive RSI retest exceeded the prior reading at the Confirmation Point as it continued above the PRZ.

This example shows the typical price action involved with a violation of the RSI BAMM setup. Specifically, ICE formed the RSI BAMM with a 1.13 extension that was projected to complete at $72 a share. However, the price action exceeded this area and continued through the 1.618 stop loss projection.

INTERCONTINENTAL EXCHANGE (ICE): 5-MINUTE
BEARISH ALTERNATE BAT AND BEARISH RSI BAMM FAILURE

The chart in Figure 6.91 shows the Bearish Alternate Bat that completed at the RSI BAMM Confirmation Point. The combination of the bearish pattern and the RSI BAMM setup clearly defined the $72 level as critical short-term resistance. Despite the ideal conditions, the price action rallied sharply through the PRZ and the RSI BAMM Confirmation Point after a brief consolidation.

FIGURE 6.91

The inclusion of the pattern with the RSI BAMM Confirmation Point helped to define a more precise area and to determine the violation of the setup. Although the violation of the 1.618 RSI BAMM extension was a substantial signal, the strong price action through the pattern’s PRZ was the definitive technical evidence that indicated a failure at hand.

INTERCONTINENTAL EXCHANGE (ICE): 60-MINUTE
BEARISH ALTERNATE BAT POTENTIAL REVERSAL ZONE (PRZ) AND BEARISH RSI BAMM FAILURE

The enlarged chart in Figure 6.92 clearly shows the decisive upside continuation through the PRZ. Although the general rule of thumb in the case of the 1.13 RSI BAMM incorporates a 1.618 extension as the stop loss limit, the pattern’s PRZ in this example of ICE signaled a violation much earlier.

FIGURE 6.92

It is important to note that the same rules apply with the 1.618 RSI BAMM extension. The essence of determining the validity of an opportunity is to analyze the price action as it completes the pattern and retests the overbought RSI 70 level. If the action in both the price and the RSI decisively violates its respective technical levels, a significant continuation of the primary trend typically follows. Although it will require some time to effectively decipher these situations, the ability of these techniques to distinguish such opportunities is immensely accurate.