February 2006

When AB Doesn't Equal CD – Part One

If you are familiar with harmonic trading you are likely well acquainted with parallel moves. (Bulkowski refers to them as measured moves). My mentor, Larry Pesavento, has popularized the expression AB equals CD. All of these descriptions refer to the following pattern. The chart actually shows two of these patterns. The first is labeled in upper case blue and the second in lower case red:



The pattern will be found in every Gartley 222 pattern which is essentially two parallel moves attempting to make a new high or low. The pattern frequently completes at a point that Elliott wave technicians would label as a larger degree wave 2 or 4. The internal structure of the pattern can also be labeled as an ABC correction with each letter referring to a specific wave in the pattern or correction:




Robert Miner refers to one aspect of this pattern using the expression " alternate price projection". AB equals CD when the A wave is projected from the end of wave B and the market reverses direction near the end of this projection. This would be a 100% alternate price projection or APP. The challenge for many traders is dealing with those situations where a correction is anticipated but the market either moves moves well beyond the 100% APP or reverses before the 100% APP. In the following chart, we have shown the exact 100% APP on the previous charts:



As you can see AB does not always equal CD. Can we anticipate and profit from these situations? The answer is yes but this requires some additional analysis of wave structure, angles, gaps and end of wave projections or convergence zones as well as the use of an oscillator. In future issues of Trade Tips we will explore how the trader can use these additional tools to successfully anticipate and trade patterns where AB does not equal CD.


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