After a quick reactive bounce to the A point, the structure abruptly continues the decline, only to find support slightly past the prior low at X. This is the failed wave 3 or wave 5 – in Elliot Wave terms – that establishes the rest of the structure.
However, the important limits from the Harmonic Trading perspective requires that this X, A extension be at least a 1.13 but not greater than a 1.618. After that impulsive failed wave is established, the BC leg rallies to at least a 1.618 extension of the AB length but it does not exceed 2.24.
Again, this tight range of 1.618-2.24 is a defining element of the structure. If the 1.618 limit is not reached, the structure is not a valid 5-0.
- Bullish 5-0 Pattern:
It will take some time to begin to identify this structure but the obvious characteristic is the failed down wave followed by a precise 1.618-2.24 extension. At that point, it is important to calculate the 50% retracement level with the Reciprocal AB=CD and study the price action in the PRZ.
Dow Jones Industrial Average ($INDU): 5-Minute
This intra-day chart of the Dow Jones Industrial Average exemplifies an ideal 5-0 structure. After an extended decline from 9855, the index bounced (A) and then declined a bit further taking out the prior low (X) in an intra-day shake out to the 1.13 extension, before rallying in the mid-afternoon to the C point.
- Dow Jones Industrial Average ($INDU): 5-Minute:
Millennium Pharmaceutical (MLMN): Weekly
This chart of Millennium Pharmaceutical demonstrates the effectiveness of the pattern in longer-term situations. After declining steadily in through 2002, the stock completed a failed down wave that nominally took out the prior low in early 2003 before rallying sharply to the 2.0 projection of the AB leg.
- Millennium Pharmaceutical (MLMN): Weekly:
Standard and Poor’s 500 June 2004 Mini-Contract(ES_M4): 60-Minute
This chart of the ES was illustrated in advance. The structure was quite distinct and the 50% retracement was calculated at 1113. In addition, the Reciprocal Bullish AB=CD was projected to complete in the same exact area.
- Standard and Poor’s 500 June 2004 Mini-Contract(ES_M4): 60-Minute:
- Potential Reversal zone (PRZ) :
- ES reversed :
Although it will take time to identify these situations, 5-0 opportunities like these occur frequently in the financial markets.