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39

This stock chart is another great example of a bullish AB=CD pattem that appeared in Fannie Mae. Fannie Mae completed an almost exact AB=CD pattem on the following daily chart.

FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNM): DAILY

AB=CD

©EigCharts.com

4 3 2 1

tiar

ftor

The distance of the AB leg was 8 3/8. The stock reversed at point D, just 3/16 past the exact completion of the AB=CD pattem. The CD leg was 8 9/16 points, and it reversed at 65 1/2. It is important to note that the 1.27 projection of the leg completed at 64 3/4. So, the potential reversal zone in this general area was between 64 3/4 to 65 3/4.

The AB and CD legs were very symmetrical in time as well, as each leg was almost equivalent. The time down for the AB leg was 12 price bars, while the CD leg was 10 bars. It is important for the time of each leg in an AB=CD pattem to be closely equivalent. However, it is not necessary for the legs to be exact in duration for the pattem to be valid.



These examples illustrate the effectiveness of the bullish AB=CD pattem in determining significant buying opportunities. The pattems and the Fibonacci projections clearly define the areas where reversals can occur. Although exact AB=CD pattems do occur, it is important to understand that the reversal at point D should occur within approximately a point of the equivalent AB leg. Therefore, you should use the pattem to define the general area of the potential reversal zone. As the stock approaches this area, you should get ready to buy.

Bearish AB=CD

In the bearish AB=CD pattem, the points must be aligned exactly as the illustration shows. Point A must be the lowest point and point D is the highest point. Also, I refer point D as the completion point of the pattem. So, when I refer to the "completion point," I mean point D.

bearish ab = cd

sell at point d!

The bearish AB=CD pattem is difficult to integrate in your trading. When a stock is rallying, you think of a rising price as strength. Also,



referring to the diagram, when the CD leg rallies above point B, you would assume that this price action is bullish - thinking that the move is a breakout. Actually, the pattem is indicating that you should get ready to sell.

Preparing yourself to sell when this pattem emerges is more difficult than it seems. When I initially utilized this technique, I resisted selling at the completion point. I literally had to train my brain to execute in this manner. Much to my suiprise, the pattem worked more times than it did not. It took me a while to truly execute the AB=CD effectively. Sometimes, I still hesitate and do not execute at my predetermined price. But, the more I adhere to this framework, the more my trading improves.

Bearish AB=CD Stop Loss

The bearish stop loss should be place a point or two above the completion of the exact AB=CD. Although a stock might exceed the completion point, a valid reversal should occur relatively soon after hitting this area.

bearish ab= cd

stop loss above point d!



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