2

AB=CD®, Bearish
B D

C
A

R E S U LT S S N A P S H O T
Appearance: A three-leg zigzag pattern with two turns located by Fibonacci ratios.

Downward Moves

Bull Market Bear Market

Performance rank 5 (worst) out of 5 3 out of 5
Breakeven failure rate 26.3% 10.2%
Average drop –12.7% –21.6%
Volume trend Downward Downward
Point D reversal rate 32% 38%
How many reach point D? 95% 98%
See also Bearish bat, bearish butterfly, bearish crab, bearish
Gartley, measured move up

You’ll need a computer to find this pattern unless you’re incredibly fast
with a calculator and have lots of time to waste searching for the thing. If you
have access to a computer with pattern recognition software, then this pattern
is as plentiful as hair on a gorilla. If your software is better than mine or you
have special sauce that you can add to the ingredients, then your pattern may
behave differently than the ones I studied.
I measured performance of Fibonacci-based patterns differently than I do
other chart pattern types. That’s because we’re looking for a reversal at the end
of the pattern and not an up or down breakout. Therefore, the layout of this
chapter is different from most other chapters in this book.

27
28 AB=CD®, Bearish

The bearish AB=CD performs in two ways. First, if you know the first
three turns (ABC), then you can anticipate at what price the last turn (D) will
appear. This works well, with price reaching D nearly all of the time (95% of
the time or more). Second, once price reaches D, it’s supposed to turn lower.
My tests show this doesn’t work well (only 32% to 38% of the time). As I men-
tioned, this could be a flaw with the model I used. Your software may perform
differently.
Let’s run through the rest of the Results Snapshot for the bull market
(you can compare the results with the bear market). I measured the drop from
the peak at turn D (the last in the pattern) to the ultimate low. Of the five
bearish Fibonacci-based patterns I studied, this one performs worst in the bull
market when price drops just 12.7%. The breakeven failure rate is 26.3%,
which is high. That means price fails to drop more than 5% over a quarter of
the time. Volume trends downward, but it’s close to random.
Let’s take a closer look at this pattern to discover what this mysterious
point D is and what the pattern looks like.

Tour
The bearish AB=CD is a Fibonacci based pattern, meaning Fibonacci ratios
determine the turning points.
Figure 2.1 shows an example of a bearish AB=CD pattern. The pattern
appears as turns ABCD on the chart. In this example, leg AB’s height is similar
to the height of CD, hence the name of the pattern. In the ideal case, you’ll see

Advanced Micro Devices, Inc (AMD)

48
45
43
41
39
37
35
33
31
29
27
D
25
B 23
22
21
20
19
C 18
17
A 16
15
E 14
13
12
11
00 Jul Aug Sep Oct Nov Dec Jan 01 Feb Mar Apr May

Figure 2.1 A bearish AB=CD pattern correctly predicts a downward move in the
stock after turn D.
 Identification Guidelines 29

leg CD equal AB. Often, however, the CD leg may be a Fibonacci extension
away (meaning point D can be far away from the other three turns). That’s not
a flaw. Rather, that’s just the way the pattern is constructed.
The duration (days) of AB should also equal the CD duration in the ideal
case. Here we see leg AB lasting 6 calendar days and CD lasting 8. That’s quite
close, isn’t it? Most of the time, like I described for price, point D’s date can be
far removed from the other points.
In well-behaved patterns of this type, the slope of the AB line should be
similar to the CD slope, with a retrace in between. That’s almost what you
see in Figure 2.1, but it’s seldom that pretty. In fact, you can see some bizarre-
looking AB=CD patterns even though they qualify as valid Fibonacci patterns.
Volume trends downward in this example, shown on the chart as E.
This ABCD is a good performer. Price completes a tidy and compact-
looking pattern and then price falls, making an extended decline into December.
That’s how the pattern is supposed to behave.
Let’s go through the guidelines for identifying these patterns.

Identification Guidelines
Table 2.1 shows identification guidelines for the chart pattern, and Figure 2.2
shows a typical example. The pattern appears in the figure as ABCD.
Appearance. As I mentioned, the shape of the bearish AB=CD can look
weird when point D is far from the ABC turns. The figure is an example of
that asymmetry, but not an extreme one. Leg AB is 36 days long, so you might
expect (or hope) the CD move to also be that long. It’s not. CD is 66 days long
or almost twice the AB duration. It’ll be rare that leg CD matches the length

Table 2.1
Identification Guidelines
Characteristic Discussion
Appearance A three-leg zigzag pattern with two turns located by Fibonacci ratios.
BC/BA retrace The ratio of BC/BA is one of .382, .5, .618, .707, .786, or .886.
DC/BC The extension of leg DC to BC is one of the Fibonacci numbers: 1.13,
extension 1.27, 1.41, 1.618, 2, 2.24, 2.618, or 3.14.
Hills and valleys From A to B, there should be no valley lower than A and no peak higher
than B. From B to C, there should be peak higher than B and no valley
lower than C. From C to D, there should be no valley lower than C
and no peak higher than D.
Volume Trends downward most often. Don’t ignore a pattern because of an unu-
sual volume trend.
Duration I limited patterns to 6 months, but this is an arbitrary limit I use for most
chart patterns.
30 AB=CD®, Bearish

Abbott Laboratories (ABT)

74
73
72
71
70
D 69
68
67
E 66
B
65
64
63
62
C 61
60
59
58
A 57
56
55
54
F
53
52
51
50
18 Mar Apr May Jun Jul Aug Sep Oct Nov

Figure 2.2 This bearish AB=CD pattern breaks out upward.

of AB. Just because CD is almost twice as far away as AB doesn’t mean the pat-
tern is invalid. Rather, the turn is determined by the Fibonacci number used
to located it.
Let’s talk about the Fibonacci ratios.
BC/AB retrace. Retrace BC compared to the height of BA is governed
by the Fibonacci numbers listed in the table. Let’s give your slide rule a work-
out and go through the math. The low at point A is 56.81, and the high at B
is 63.85 for a height of 7.04. The low at C is 60.32. I tuned my software to
find a turn within .01 (1%) of one of the numbers listed in the table, so we get
(63.85 – 60.32)/(63.85 – 56.81) or 50.1%. That value is almost exactly the 50%
retrace (.5). So the ABC turn meets the guidelines.
DC/BC extension. If you invert the ratio found in the last step, you use
it to find the price of D. In this example, we found the closest Fibonacci num-
ber to be .5, so we’d expect point D to be twice as far away. To put it another
way, let’s pick a point D where the ratio of DC to BC is 2. The high at point D
is 67.36, so the equation is (67.36 – 60.32)/(63.85 – 60.32) or 1.99 (or about 2).
We found turn ABC to obey one of the numbers listed in the table, and
we also found point D using a Fibonacci extension (one of them listed in the
table), so we found a valid AB=CD pattern.
In this example, price turns down at D, just like it’s supposed to. However,
the drop is brief (to E).
Hills and valleys. I excluded any pattern that had a peak or valley outside
of the turns as described in the table.
Volume. Although it may not look like a downward volume trend in
this example (F), linear regression says it recedes. In fact, you’ll see volume
trending downward in most AB=CD patterns and other chart pattern types,
 Focus on Failures 31

too. If volume trends upward, that’s fine. Don’t throw away a pattern because
of an unusual volume trend.
Duration. I imposed a 6-month limit to the length of most chart pat-
terns, including the AB=CD. It’s an arbitrary limit.

Focus on Failures
Figure 2.3 shows an example of a failed bearish AB=CD pattern (labeled as
turns ABCD). The pattern fails in multiple ways. The first is that price doesn’t
make it up to the predicted point D.
Turn A has a low price of 134.82, B has a high of 148.28, and C has a low
of 139.95. That gives a BC/BA retrace of .618, so the turn qualifies as a valid
AB=CD. It predicts that point D should be at 153.41 using the formula: D =
(B – C)/Ratio + C.
As the figure shows, point D falls well short of the target, which I show as
F. Instead, price rises only to D before dropping to E. Imagine that you wanted
to trade the anticipated rise to point D by buying the stock soon after turn C.
You placed a stop a few pennies below C, and you would have been stopped out
at E, which reached a low of 139.79, slightly below the low at C.
As I mentioned in the Identification Guidelines, there can’t be a low
below C on the way to the calculated point D. Point E stops the search for D
because it’s below the low at C. If you ignore that rule, then you have discov-
ered the second failure type.

Aon Corp (AON)

167
165
163
G 161
159
157
F 155
153
B 151
149
D 147
145
143
C E 141
139
137
A 135
133
131
129
127
125
Jan 18 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan 19

Figure 2.3 Price is supposed to turn down at F, but the search for point D ends
when point E is below C.
32 AB=CD®, Bearish

The second way this AB=CD fails is when price continues rising instead
of turning at D. If we ignore the lower low violation at E and assume price
climbs to F, where turn D should be (153.41), then look what price does. It
continues rising, doesn’t it? So price fails to turn at the new target D and
moves to G, peaking at 158.77, well above the 153.41 target. Shorting the
stock at F would have tested a trader’s courage against a rising price trend
when the stock climbed to G.
Look back at Figure 2.2 where it shows another example of how the pat-
tern fails to see price decline much after D. Price drops from 67.36 (point D) to
65.22 (point E), a drop of 2.14 points or 3%. Could you make money shorting
the stock at D, knowing that if you traded it perfectly, you’d make 3%?
If you owned the stock (long) and sold at D thinking price would drop,
you’d be happy that the stock dropped to E, but your joy would turn to sadness
when the stock continued climbing up to F and beyond. It would say you’d
made a mistake.
Of course I chose Figure 2.3 to highlight the failure of this pattern to
perform as expected. That’s what the Focus on Failures section is supposed
to do. In the next section, we’ll see what the numbers say about how this pat-
tern behaves.

Statistics
Table 2.2 shows general statistics for the bearish AB=CD and tailored to the
Fibonacci pattern. That means you won’t find explanations for the table entries
in the Glossary. Most are self-explanatory.
Number found. If you can program your computer to find them, you’ll
discover that they come out like worms after a heavy downpour. They were so
plentiful that I limited the number catalogued per stock.
I found the first pattern in February 1990 and the most recent in Febru-
ary 2020, finding them in 884 stocks. Not all stocks covered the entire period,
and some stocks no longer trade.

Table 2.2
General Statistics
Description Bull Market Bear Market
Number found 2,649 696
Breakeven failure rate 26.3% 10.2%
Average decline after D –12.7% –21.6%
Volume trend 54% Downward 58% Downward
Performance Up/Down volume –13%U, –13%D –19%U, –24%D
 Trading Tactics 33

Breakeven failure rate. For those patterns that see price make it up to
D and reverse there, this is a measure of how often price fails to drop more 5%
(below the high at D). The bull market value is high (ranking fourth out of five,
where one has the lowest failure rate), but the bear market rate, at 10.2%, is the
worst of the five bearish Fibonacci patterns I looked at.
Average decline after D. This is a measure of the drop after point D,
for those patterns seeing price make it up to point D and reverse there. As one
would expect, the drop in bear markets is larger than in bull markets. If you
were to trade the bearish AB=CD pattern perfectly and frequently, this is how
much you could make on average. Commissions were not included.
Volume trend. I used linear regression from the start to end of the pat-
tern and found it trends downward most of the time, but it’s near random.
Performance Up/Down volume. I checked performance when volume
was trending up or down. This applies only to those patterns that turned down
at D. The bull market shows no performance difference, but in bear markets,
the performance difference is wider and substantial. Patterns with downward-
sloping volume see price drop an average of 24% compared to a 19% decline
for those with up-sloping volume.

Trading Tactics
The AB=CD pattern can be a wonderful tool to help predict when price
will turn and then make a substantial decline. Once you know the first three
turns, you can determine when and at what price the fourth turn will appear.
And when turn D appears, the stock will drop. Does it really work like that?
Let’s find out.
Table 2.3 shows how price behaves after point D.
How often does price reach or exceed D? I checked how often price
climbed far enough to reach the calculated price of D. The table shows that
nearly all of the patterns reached the target turn.

Table 2.3
Price Move after Pattern End
Description Bull Market Bear Market
How often does price reach or exceed D? 95% 98%
How often does price turn at D? 32% 38%
How often does D appear within a week of 43% 45%
calculated time?
How many drop to point A? 24% 36%
How many drop to point B? 76% 87%
How many drop to point C? 35% 46%
34 AB=CD®, Bearish

That’s terrific! Swing traders can use this to predict how far price will rise.
They can even trade it by buying at the low at C and riding price higher, to D.
How often does price turn at D? I checked each pattern to see if a
minor high formed at the calculated point D. I found that only about a third of
the time will you see price turn lower at the calculated price of D. Because we
know price rises to D nearly all of the time, we can assume that price continues
beyond D instead of turning lower when it should.
This finding is not a deal breaker. Now that we know price will likely
continue rising, we can just stay in our trade (when we bought after turn C)
and ride the stock upward until it does turn.
How often does D appear within a week of calculated time? The
pattern can work as a predictor of when point D will occur (as well as the price
of the turn). I found the dates of the ABC turns and found the ratio of CB to
BA. Then point D followed the equation: D = (C – B)/Ratio + C using dates
instead of price.
I found that between 43% and 45% of the time point D appeared within
(plus or minus a 2-week window) a week of when it was supposed to. Because
the numbers fall well short of the expected time, I don’t think this measure
is helpful.
How many drop to. . .? If price reaches D and turns down, we know
that the average decline measures between 12% and 22% from Table 2.2. Let’s
measure how far price drops in terms of turns A, B, and C.
Point B is closest to turn D, so we would expect the stock to drop that far
most often. Indeed, the table shows that price reaches turn B between 76% and
87% of the time. Price will drop to C less often (35% to 46% of the time) and
reach the bottom of the pattern (point A) even less often.
Using these values, we can get a sense of how far price might decline. It
could be less or more, depending on the situation, of course. But at least we
have a roadmap.

Sample Trade
Figure 2.4 shows a sample trade using the AB=CD pattern.
Jacob poked me in the ribs, then pointed to the screen to discuss his trade.
“See that? It’s a double bottom.”
His fingers traced the twin bottoms at EA with a nice peak (F) between
them. “I can make money trading that.”
He placed a buy stop a penny above F. That order triggered at G, putting
him into the stock near the breakout price. Immediately, he placed a stop a
penny below the lower of the two bottoms, which in this case, was A, at 37.12.
If the trade went bad, he’d lose about 10%.
“That’s bigger than the 8% I like to see, but you have to be flexible,”
he told me.
 Sample Trade 35

American Express Co (AXP)

49
48
47

46

45
D
44
B
G 43

42
F
41

40

39

C 38

E A 37

36
10 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Figure 2.4 Jacob used the bearish AB=CD pattern to exit a trade.

For about a week, the stock cooperated and climbed to B before starting
to retrace.
“The throwback and drop to C made me nervous. I started sweating bul-
lets because I thought I’d be stopped out. Don’t believe me? The sweat started
pouring off me, and the furniture started floating. I’m not kidding. You can see
the watermark.” He pointed to a smudge on the wall. His wide grin made the
Grand Canyon look like a small ditch by comparison.
“I thought of selling, but I invariably sell a week or two before the stock
bottoms. It’s annoying. What helped me this time was when I noticed the bear-
ish AB=CD pattern.”
His software helped by providing the location for him. Let’s run through
the numbers. The low at point A was 37.13, the high at B was 43.14, and the
low of price bar C was 38.42. Crunching the numbers said that the ratio of
BC to BA was (43.14 – 38.42)/(43.14 – 37.13) or 78.5%. That was close to the
78.6% Fibonacci number, so the turn matched the identification guidelines
(Table 2.1).
If the pattern worked as he hoped, the CD leg would equal or exceed the
AB leg and make for a tasty profit.
The height of the AB move was 43.14 – 37.13 or 6.01. Added to the low
at C (38.42) gave a target for turn D of 44.43.
“I doubled my position right there,” he said and poked the screen, leaving
a fingerprint behind. The second buy was near C, and he set a target to sell both
positions at 44.43. “I raised my stop, too, to a penny below C. Just in case. . .”
The stock took off in a straight-line run up to D. The stock sold at the
exact high at D, 44.43, cashing him out of the AB=CD trade and also out of the
double bottom trade.
“Let’s do lunch,” he said. “I’ll let you buy.”