Harmonic Trading: The Bullish 5-0 Pattern

THE BULLISH 5-0 PATTERN

The Bullish 5-0, illustrated in Figure 3.5, starts at the 0 point, representing an extended down leg to begin the pattern at X. The initial point (X) acts as the low of this prior substantial decline. After a quick reactive bounce to the A point, the structure abruptly continues the decline, only to find support slightly past the prior low at X. This is the failed wave 3 or wave 5—in Elliott Wave terms—that establishes the rest of the structure.

FIGURE 3.5

The important limits from a Harmonic Trading perspective require that this X, A extension be at least a 1.13 but not greater than a 1.618. After that impulsive failed wave is established, the BC leg rallies to at least a 1.618 extension of the AB length, but it does not exceed 2.24.

Again, this tight range of 1.618–2.24 is a defining element of the structure. If the 1.618 limit is not reached, the structure is not a valid 5-0. After the BC leg has reversed from that zone, the bullish 50% retracement is measured from the B point to the C point. In addition, the Reciprocal AB=CD is projected from the C point (an equivalent length of the AB leg) to complement the PRZ. It will take some time to identify this structure, but the obvious characteristic is the failed down wave followed by a precise 1.618–2.24 extension. At that point, it is important to calculate the 50% retracement level with the Reciprocal AB=CD and study the price action in the PRZ.

EURODOLLAR (EUR_A0-FX): 5-MINUTE

BULLISH 5-0 PATTERN

This chart of the Euro demonstrates the effectiveness of the pattern in shorter-term situations (see Figure 3.6). After declining steadily throughout the previous day, the price action completed a failed down wave that nominally took out the prior session’s low before rallying sharply to the 1.618 projection of the AB leg.

FIGURE 3.6

The Euro rolled over to retest the 50% level before resuming the uptrend. The Reciprocal AB=CD complemented the 50% retracement at the 1.3910 level, defining a precise area to get long.

STANDARD & POOR’S 500 TRUST (SPY): DAILY

BULLISH 5-0 PATTERN

This chart of the S&P 500 Spider is another example of an ideal Bullish 5-0 pattern (see Figure 3.7). On this daily chart example, the SPY ETF possessed a distinct Bullish 5-0 pattern that exemplifies the ideal nature of the pattern.

FIGURE 3.7

Starting with an impulsive AB leg with a 1.13 extension, the ETF formed an ideal extended BC leg that reversed at the 2.0 projection of AB. The price action reversed sharply after testing the PRZ of the pattern.

NASDAQ 100 MARCH 2010 MINI-CONTRACT (NQ_H0) : 60-MINUTE

BULLISH 5-0 PATTERN

Figure 3.8 shows a distinct 5-0 pattern on the 60-minute chart that reversed sharply after testing the entire PRZ.

FIGURE 3.8

This chart is remarkable due to the pattern pinpointed the intraday support. The price action formed the proper alignment of ratios for the structure, stabilized in the PRZ, and reversed immediately after testing the completion point of the pattern. These characteristics are the ideal signs of a valid reversal for any timeframe. The key is to focus on the price action following the completion of the pattern.

STANDARD & POOR’S 500 JUNE 2009 MINI-CONTRACT (ES_M9): 15-MINUTE

BULLISH 5-0 PATTERN

This chart of the ES was illustrated in advance (see Figure 3.9). The structure was distinct, and the 50% retracement was calculated at 936. In addition, the Reciprocal Bullish AB=CD was projected to complete in the same area.

FIGURE 3.9

This 60-minute chart exemplifies the ideal structure for the 5-0, especially with the distinct 2.0 impulse projection. Like a magnet, the price action steadily declined to the 50% level of that extreme extension to complete the pattern. The chart in Figure 3.10 shows the price action, as the ES approached the PRZ at 1113.

STANDARD AND POOR’S 500 JUNE 2009 MINI-CONTRACT (ES_M9): 15-MINUTE

BULLISH 5-0 PATTERN POTENTIAL REVERSAL ZONE (PRZ)

The black line represents the Bullish Reciprocal AB=CD completion point, and it converges at the same level as the 50% retracement. After a sharp decline into the PRZ, the price action was able to stabilize. After some consolidation, the ES held its ground above the initial test of the completion point.

FIGURE 3.10

This is an excellent example that possessed ideal price action in a reversal from a valid Bullish 5-0. The structure was distinct, the alignment of Fibonacci numbers was satisfactory, and the price action reversed precisely in the zone. Although it will take time to identify these situations, 5-0 opportunities like these occur frequently in the financial markets. Although a “clean” reversal from a single test of a PRZ is ideal, it is more common for price action to retest this pivot area a second or even multiple times before reversing significantly.

BULLISH AB=CD WITHIN CD LEG OF 5-0 PATTERN

Although the 5-0 pattern requires only two harmonic numbers to define the PRZ, there are many situations where a smaller ab=cd pattern will form in the CD leg of the Reciprocal AB=CD (see Figure 3.11). These are unique situations because the ab=cd is usually distinct, and their structures can be effective in complementing the other numbers of the 5-0 pattern.

FIGURE 3.11

Although the other numbers in the pattern are more significant in defining the completion of the setup, the smaller ab=cd acts as an effective structural signal that validates many successful reversals. Furthermore, I believe that a Bullish 5-0 with a smaller ab=cd is a technically more significant harmonic structure than a pattern without one.

JAPANESE YEN (JPY_A0-FX): 60-MINUTE

BULLISH 5-0 WITH BULLISH AB=CD

This chart of the Yen shown in Figure 3.12 is an excellent example of multiple AB=CDs converging at the completion of the 5-0 pattern. Although the completion of the smaller ab=cd was slightly above the other harmonic numbers, the addition of this pattern helped to confirm the entire area as a valid PRZ.

FIGURE 3.12

This example shows an ideal structure that possesses a distinct convergence of the 50% retracement and the Reciprocal AB=CD completion, as well. In particular, the impulsive 2.0 extension is another aspect of this example that can be found in most valid 5-0 patterns. The BC leg established the entire structure for the eventual completion at the D point. In addition, the pattern completed just above the psychological 90-level. Such round numbers can add to the validity of a setup, especially when they occur within close proximity of a PRZ.

ADOBE SOFTWARE (ADBE): DAILY

BULLISH 5-0 PATTERN

The example of Adobe Software shown in Figure 3.13 exhibits an ideal structure that possessed a distinct combination of harmonic ratios to validate the pattern. Clearly, the initial AB leg that completed at a 1.13 retracement was the primary clue of a valid structure. After making a critical low at the $31.50 level (B point), the stock surged to the 2.0 extension.

FIGURE 3.13

Adobe promptly reversed at that extreme impulse extension and formed a distinct Reciprocal AB=CD that converged with the 50% retracement just under the $38 area. This example underscores the importance of a distinct structure that ideal 5-0 patterns must possess.