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Basic Building Block of any Pattern
A-B-C down
Prices for assets, stocks, currencies, bonds and ever real estate, never go up and down in a straight line fashion. Prices in all the markets move in zig zags because people are driving force of any market. And when human beings make decisions on buying or selling stocks, real estate, or art they do that under influence of emotions and cognitive biases.
The vast majority of market participants are driven by prime emotions like fear or greed. They chase price all the time. They buy when price goes up long enough to make them confident it will keep going in the same direction.
They sell when price goes down deep enough to make them scared. First, they see price falls under the level where they bought a stock. Then it continues to fall relentlessly day after day. An investors starts looking for expert opinions and they say “the worse is not over”. This is when fear kicks in and investor gets confident price goes to zero and he or she will most likely lose all the money invested.
That never ending shift of prevailing sentiment among the market participants create a natural rhythm of the market. One step forward, one step back and one step forward again. That simple! Price makes a move up, then down and then up again. It’s like a dance when partners make simple repeating moves but combination of those simple steps creates a beautiful performance. Let me show you how simple A-B-C moves of different sizes combined together form long term rallies and corrections that last months and years!
MAIN FEATURES
- The first move in the wave A down is the first action of a new A-B-C down fractal
- In A-B-C down fractal bears push the price lower in the wave A until no one is willing to sell at such a low price. This is when bulls react to the first drop based on the conviction that price went too low too fast
- In any A-B-C down fractal the starting point at the top of the wave A down is a critical resistance for subsequent corrective wave B up
- The starting point of wave A down can not be breached by wave B up
- A corrective wave B up can push price all the way up to the starting point of the wave A down. In that case we say that "wave B up retraced 100% of the preceding wave A down".
- However, wave B up is not allowed to rise under the starting point of the wave A down. If that happens, we say that "the pattern gets invalidated".
- In majority of cases, corrective wave B up manages to push price higher to a distance equal to 1/3, 1/2 or 3/4 of the distance covered by the first drop in wave A down.
- Subwave C down has to make a lower low under the lowest point of the subwave A down
The best way to understand how this pattern works is to study collection of charts with real life examples.
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