The AB=CD pattern contains all three of these movements in a simple geometric form. Its trading value comes from its repetitive nature. It
measures buying enthusiasm and selling climaxes.
Using an AB=CD sell pattern as an example (refer back to Figure 4.5),
as the price begins to rise in the AB leg it catches the interest of those wanting to be in early. This could be early buying from large money sources
such as mutual funds, pensions, and so on. As the price continues to rise,
speculators may take note and climb on board, causing the price to rise
further into the AB leg. Toward the top of the AB leg, individual investors
(the general public) may start buying, not wanting to miss the move. There
may be some news items on the individual stock or market, further drawing attention to the price rise. It is usually the case that this is toward the
end of the first leg. Once the first leg is complete, some profit taking occurs and the price begins down. Those who bought near the top of this leg
are now at a loss and some fear begins to set in, which can increase the
selling.
As the price declines toward the Fibonacci retracement levels, those
who may have missed the first move up begin to step in to buy the dip.
Institutional investors may add to their positions, and speculators also may
step in to buy a higher low, providing price support. The selling subsides,
and the price finds support as more new buyers come into the stock or
market and the price begins to resume its rise (CD leg). At this point some
investors who rode out the loss from buying near the top of the AB leg
may sell as the price approaches their breakeven point on the retracements
back up from the BC leg. Some who missed getting out at a profit near the
top of the AB leg now take profits as the price is close to those levels again.
The CD leg now begins to repeat the cycle of buyers, and as the price
rises further those who realized they sold too soon may jump back in. A
new surge of buying (or selling) will then push the price through the B
point to complete the pattern at D.