The basic “ABC” pattern is first described in H.M. Gartley’s book, Profits in the Stock Market (1935). This pattern is shaped like a lightning bolt and signals a trend, a retracement and the resumption of the trend. This pattern is also called the “ABC Wave” or 1-2-3 pattern by technical analysts.
The “ABC” patterns forecast key market turning points and profit targets for traders. “ABC” patterns pinpoint important pivot levels with high and low prices and identify key trading zones.
The key point in identifying a “ABC” is correctly finding the A, B, and C pivot points in a chart. These key pivots are found using for various “pivot strength” levels, and for its correction waves. Once A, B, and C pivots are identified, an Auto-levels algorithm is applied to determine the confluence level “D”. This area is called “Potential Reversal Zone” (PRZ).
The “C” pivot in “ABC” patterns are determined by the Fibonacci retracement of (38.2 to 61 -8 percent) of AB swing. The projection from “C” level is measured using fib-ratios of AB and BC swings. Some traders use the confluence of these ratio levels as areas for profit taking.
ABC Bullish Pattern
Trading an ABC Bullish Pattern
The example above shows an ABC pattern from the S&P Emini futures 30 minute chart. After formation of the AB swing, the “C” pivot point was expected around 62% of AB range. Price trading above the previous bar’s high signaled a potential “long” trade.
- Enter a “long” trade above the previous bar’s “high.”
- Place a “stop” order below level “C.”
- Set “targets” at 100% of AB range and at 127% of BC range.
ABC Bearish Pattern
Trading an ABC Bearish Pattern
The example above illustrates an ABC Bearish reversal pattern in daily Gold futures chart. Gold made a 20-day swing high of 658 in December. During mid December, Gold reached a swing low of 621 (at B). At the beginning of January 2007, Gold retraced 78.6% of the AB level to another “swing high” at “C” to complete the ABC “bearish” pattern. A wide-range bar signaled a potential short trade.
- Enter a “short” trade below the low of previous bar 63 1 (38% of the AB range).
- Place a “stop” order above level C at 650.
- Set “targets” at 100% of AB range (at 605) and 127 to 138% of BC range.