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40 As you study the following charts with AB=CD pattems, it is important to examine the price action in the area of the completion ofthe pattem. If the set-up is not a valid reversal, the stock usually will continue its rally and close above the completion area. These signs are critical to observe because any valid reversal must materialize in this specific area where the CD leg is equivalent to the AB leg. Furthermore, valid reversals will possess price bars that confirm the change in trend. Conversely, invalid reversals will possess price action that continues in the predominant trend. This may seem over-simplified, but the price action will provide clear signals of its future direction. Ideal Bearish AB=CD In an ideal bearish AB=CD pattem, the AB leg will be the first move up. The leg will be either a .618 or a .786 retracement of the AB leg. After measuring the length of AB, you project the same distance from point C.  8 = sell at point D!
This measurement will indicate where the basic AB=CD pattem completes. It is also important to be aware of the time synmietry, as each leg should be closely equivalent in duration. Lets look at the following examples, as they will demonstrate clearly the framework of the pattem. The first bearish example of Microsoft illustrates the pattem very well. The stock formed two distinct price legs that reversed almost exactly off the completion of the 1.27 of the leg. Microsoft formed this beautiftil bearish AB=CD over a six month period. It is amazing that the stock can form such a clear pattem and a significant reversal like this. This pattern indicated the precise area where the stock could change course and begin a new downtrend. .--ID  SO 60 40 20 MICROSOFT (MSFT): DAILY BEARISH AB=CD SiBlgCharls.coiri flpn May Jyn 301099
The AB=CD pattem was calculated to complete at 98 3/4. This area was complemented by the 1.27BC projection, which was at 101. Although the pattem was very clear, the stock gapped up on the open and rallied sharply on the day it hit the potential reversal zone. These two waming signs, an extreme price range and a price gap, would have kept you from selling on this day. But, on the next moming, the stock could not continue its move, as Microsoft topped at 100 3/4. On the day after the stock topped, the reversal was confirmed by the severe gap down on the open. In fact, the stock fell nearly 20 points within a month. The following chart clearly shows the daily price action, as it hit the potential reversal zone. On the first day Microsoft hit the AB=CD completion target, the price action was very sfrong. But, on the next day the stock reversed after falling a 1/4 point shy of the 1.27BC projection. I.27BC @ 101 AB=CD @ 98 3/4 MCROSOFT (MSFT): DAILY T BEARISH AB=CD PRICE ACTION IN THE POTENTIAL REVERSAL ZONE 84 82 80 7S 76 74 70 60 50 40 30 20 10 0 ©BlgCharts.com iiiiiilliiiiiiiiilllnlll  7 21 23 25 29 Jul 6 S 12 14 IS 20 22 26 2S 4 10 12
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