The5-0Pattern.pdf

The 5-0 Pattern

Although I have been aware of the structure for quite some time, the 5-0 Pattern is a

relatively new discovery within the Harmonic Trading approach that I have refined

immensely over the past year. I have studied hundreds of cases to define the best 5-0

structures. In this article, I will outline the basic identification techniques for the pattern.

Although I will not cover execution or trade management strategies, the principles are the

same as for all harmonic patterns and can be found in my 2004 book, Harmonic Trading

of the Financial Markets: Volume One . I wanted to release the pattern with the intention

of providing a thorough review of the principles of the 5-0 in my next book, Harmonic

Trading of the Financial Markets: Volume Two – which will be published in June 2005.

Although this new pattern possesses many characteristics that are consistent with all

harmonic structures, there are several traits that truly differentiate it from the rest.

The 5-0 Pattern is a unique structure that possesses a precise alignment of Fibonacci

ratios to validate the pattern. Although the 5-0 is considered a retracement pattern, as the

50% retracement is the most critical number within the Potential Reversal Zone, the

measurements of the various price legs are slightly different than the Bat or the Gartley.

The 5-0 is within the family of 5-point harmonic reversal structures and is primarily

defined by the structure’s B point – as is mandatory for all harmonic patterns. However,

the 5-0 requires a reciprocal AB=CD measurement to define the pattern’s completion.

The basic premise of the pattern is to identify distinct reactions following the

completion of a contrary trend. Valid 5-0 patterns typically represent the first pullback of

a significant trend reversal. In many instances, the AB leg of the structure is a failed final

wave of an extended trend. Within Elliott Wave terms, the AB leg may be a failed wave

3 of a corrective "abc" or a failed wave 5 of an entire completed trend. Although these

are obvious similarities, from the Harmonic Trading perspective, it is important to

examine the structure via its relative Fibonacci measurements to satisfy the pattern

requirements.

The 5-0 is an incredibly precise pattern that possesses only two numbers – the 50%

retracement of the BC leg and the Reciprocal AB=CD. It is important to note that the

measurements utilized to define the Potential Reversal Zone (PRZ) are different from all

other harmonic patterns in two distinct ways.

50% BC Projection Defines the Pattern’s Completion Point:

In most cases, the XA leg is the defining measurement of the pattern’s completion,

while the BC projection is normally a complimentary number. But, the 5-0 pattern

utilizes the 50% BC retracement as the defining limit in the set up.

The 5-0 Pattern By Scott M. Carney

Reciprocal AB=CD :

The 5-0 pattern incorporates a new type of AB=CD measurement - a Reciprocal

AB=CD pattern. A Reciprocal AB=CD pattern is typically a shorter counter move of

equal length within a longer trend. They look like a lazy “Z” or “S.”

The Reciprocal AB=CDs within the specific 5-0 structure are quite effective in defining a

precise area for a potential reversal. Although the 50% retracement is the most important

number at the pattern completion point, it is still essential to examine the entire range.

Basic 5-0 Requirements

Although the pattern incorporates 5 points within the structure (X, A, B, C, D), the starting

point of the structure (0) can be the beginning of any extended price move. However, the

initial point X must possess a specific alignment with respect to the A and B point. The X, A ,

B formation of the structure is usually some type of impulse move. The XA projection that

defines the B point can not exceed a 1.618. Any extension greater than a 1.618 will negate the

structure, as smaller impulse moves are preferred. Again, this is the failed wave 3 or wave 5 –

in Elliott Wave terms – that establishes the rest of the structure.

The BC leg is the longest price length of the structure and must be at least a 1.618 extension

of the AB length but it must not exceed 2.24. This tight range of 1.618-2.24 is a defining

element of the structure. If the 1.618 minimum limit is not reached, the structure is not a valid

5-0.

After the BC leg has reversed from that zone, the 50% retracement is measured from the B

point to the C point. In addition, the Reciprocal AB=CD is projected from the C point (an

equivalent length of the AB leg) to compliment the Potential Reversal Zone (PRZ). The

following illustrations and examples will clearly explain these concepts.

The 5-0 Pattern By Scott M. Carney

The Bullish 5-0 Pattern

The Bullish 5-0 starts at the 0 point, representing an extended down leg to begin the pattern at

X. The initial point X acts as the low of this prior substantial decline. 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.

After the BC leg has reversed from that zone, the bullish 50% retracement is measured from

the B point to the C point. In addition, the Reciprocal AB=CD is projected from the C point

(an equivalent length of the AB leg) to compliment the Potential Reversal Zone (PRZ). 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

The 5-0 Pattern By Scott M. Carney

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.

After rolling over at the 2.0 extension, the 5-0 was set up with the 50% retracement at 9838

and the Reciprocal AB=CD at 9839. The index reversed sharply after exceeding this area

slightly.

The 5-0 Pattern By Scott M. Carney

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.

The stock rolled over to retest the 50% level before resuming the up trend. The Reciprocal

AB=CD complimented the 50% retracement just under the $12 level, defining a precise area

between 11.50-12.30 to buy the stock.

The 5-0 Pattern By Scott M. Carney

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