New Harmonic Patterns: 5 Pattern, Reciprocal, Bullish Reciprocal

THE 5-0 PATTERN

Although I have been aware of the structure for quite some time, the 5-0 pattern is a relatively new discovery within the Harmonic Trading approach. I have studied thousands of cases to define the best 5-0 structures. Although I will not cover execution or trade management strategies, the principles are the same as for all harmonic patterns and can be found in Harmonic Trading: Volume One. Although this new pattern possesses many characteristics that are consistent with all harmonic structures, several traits truly differentiate it from the rest.

The 5-0 pattern is a unique structure that possesses a precise alignment of Fibonacci ratios to validate the structure. Although the 5-0 is considered a retracement pattern, as the 50% retracement is the most critical number within the Potential Reversal Zone (PRZ), the measurements of the various price legs are slightly different than the Bat or the Gartley. The 5-0 is within the family of 5-point harmonic price structures. However, the required B point alignment for other patterns does not apply in the case of the 5-0. Rather, the 5-0 requires a minimum Extreme Harmonic Impulse Wave of at least 1.618—but not to exceed 2.24—at the C point to distinguish the setup. In addition, the 5-0 requires a Reciprocal AB=CD measurement to define the pattern’s completion.

The basic premise of the pattern is to identify distinct reactions following the completion of a contrary trend. Valid 5-0 patterns typically represent the first pullback of a significant trend reversal. In many instances, the AB leg of the structure is a failed final wave of an extended trend. Within Elliott Wave terms, the AB leg may be a failed wave 3 of a corrective “abc” or a failed wave 5 of an entire completed trend. Although these are obvious similarities, from the Harmonic Trading perspective, it is important to examine the structure via its relative Fibonacci measurements to satisfy the pattern requirements. The 5-0 is an incredibly precise pattern that possesses only two numbers—the 50% retracement of the BC leg and the Reciprocal AB=CD. It is important to note that the measurements utilized to define the PRZ are different from all other harmonic patterns in two distinct ways: the structural completion point of the final leg and the calculation of the AB=CD pattern.

50% BC PROJECTION DEFINES THE PATTERN’S COMPLETION POINT

In most cases, the XA leg is the defining measurement of the pattern’s completion, while the BC projection is normally a complementary number. In contrast, the 5-0 pattern utilizes the 50% BC retracement as the defining limit in the setup.

RECIPROCAL AB=CD

A Reciprocal AB=CD pattern is typically a shorter countermove of equal length within a longer trend. Each price segment is distinct and forms a structure that looks like a lazy “Z” or “S.” The pattern resembles an Elliott Wave Zig-Zag structure but is distinguished by the assigned Fibonacci ratios.

BULLISH RECIPROCAL AB=CD

The Bullish Reciprocal AB=CD possesses price segments that are equivalent and typically form a structure that marks the continuation of the primary trend (see Figure 3.1). Although I will discuss Reciprocal

AB=CD patterns within well-established bullish channels later in the book, the structure works best in these situations.

FIGURE 3.1

It is important to remember that the Reciprocal AB=CD is more of an approximation measurement that quantifies the general area where the primary trend will continue. In many situations, the AB leg of the Bullish Reciprocal AB=CD is normally the first corrective move in a newly established a trend. Although the CD leg will at least test the equivalent completion point in most cases, the PRZ of the Reciprocal AB=CD is not as precise as the regular bullish AB=CD pattern.

FEDEX CORP. (FDX): WEEKLY

BULLISH RECIPROCAL AB=CD

The chart of Fedex Corp. illustrated in Figure 3.2 exemplifies the concept of a Bullish Reciprocal AB=CD, as the AB leg was the first corrective move within a longer-term bullish channel on the weekly chart. The stock reversed sharply after testing the equivalent CD leg that was approximately 15 points. The completion of the Reciprocal AB=CD was projected at 44.50, and it was complemented by the 0.618 weekly reciprocal retracement at 43.95. It is important to note that the reciprocal retracement was established by the prior 1.618 AB projection, and it triggered the corresponding completion of the CD leg at the 0.618 retracement.

FIGURE 3.2

This weekly chart clearly exemplifies the ideal structure of the Reciprocal AB=CD pattern. Again, it is important to look for patterns that utilize a clear prior corrective move early within the newly established bullish trend. FedEx possessed a sharp pattern on this weekly chart over the course of two years. The strong reversal precisely at the PRZ was a clear indication that the new bullish trend was about to resume. Patterns such as these form on weekly, daily, and intra- day charts in the same fashion.

BEARISH RECIPROCAL AB=CD

In the same manner as the bullish version, the Bearish Reciprocal AB=CD, illustrated in Figure 3.3, must possess a distinct structure. Again, the AB leg is typically the first corrective move within a new downtrend. Although the projected completion represents a general approximation of the continuation of the primary trend, the price action in this area will reverse shortly after testing the entire zone in the valid setups.

FIGURE 3.3

The CD leg is equivalent and completes at the reciprocal retracement of AB. It is important to be mindful of the reciprocal ratios established by the AB projection. For example, a C point extension of a 1.618 will correspond to an approximate 0.618 AB retracement at the D point. In combination with the reciprocal AB=CD completion point, the reciprocal ratio serves to confirm the potential resistance of the pattern.

BAKER-HUGHES (BHI): WEEKLY

BEARISH RECIPROCAL AB=CD

Baker-Hughes formed this distinct Bearish Reciprocal AB=CD that possessed a distinct AB leg (see Figure 3.4). Although the CD leg was slightly longer than the 26-point AB leg, the 70.7% Reciprocal Retracement Ratio served to confirm the area near the completion point of the pattern as important short-term resistance.

FIGURE 3.4

Again, it is important to remember that the completion point of the pattern represents a minimum approximation of potential harmonic resistance. Therefore, the reciprocal ratio is important in these situations to confirm the completion point.

BASIC 5-0 REQUIREMENTS

Although the pattern incorporates 5 points within the structure (X, A, B, C, D), the initial price leg (0) can start from the beginning of any extended price move. However, the initial point (X) must possess a specific alignment with respect to the A and B point. The X, A, B formation of the structure is usually some type of Extreme Harmonic Impulse move. The XA projection that defines the B point ideally must not exceed a 2.24. Any extension greater than a 2.24 will negate the structure, as smaller impulse moves are preferred. Again, this is the failed wave 3 or wave 5—in Elliott Wave terms—that establishes the rest of the structure.

• Look for initial impulsive reversal at X, A, B points that possesses a 1.13-1.618 extension.
• The AB projection must possess a minimum 1.618 extension at the C point but not exceed 2.24.
• The D point is defined by the 50% BC retracement and the Reciprocal AB=CD pattern completion.

The BC leg is the longest price length of the structure that must be at least a 1.618 extension of the AB length, but it must not exceed 2.24. This tight range of 1.618–2.24 is a defining element of the structure. If the 1.618 AB minimum extension is not reached, the structure is not a valid 5-0. After the BC leg has reversed from that zone, the 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.

Although the 5-0 pattern is not a typical M- or W-type price structure, the same principles within the Harmonic Trading approach are applied to these situations. The Reciprocal AB=CD helps define the general area, while the 50% retracement pinpoints the precise range of the harmonic zone. The following illustrations and examples will clearly explain these concepts.