Bearish 5-0 Pattern Violation

In much the same manner as the Bullish 5-0 violation, the bearish situation offers a specific opportunity to execute a trade on the breakout above the PRZ, attempting to capitalize on the continuation of the predominant trend (see Figure 3.26). In this case, when the 5-0 pattern fails, the price action typically rallies decidedly higher. In many cases, the breakout in the price action usually rallies to at least the following 0.886 retracement beyond completion of the pattern. The next illustration shows an ideal violation of the 5-0 PRZ.

Figure 3.26.

When the 50% retracement area has been exceeded, the breakout above this area is the decisive signal for the trade. It is important to note that the trade opportunity does not develop until the entire PRZ has been tested and the price action has clearly violated the initial test. Although this is more of a general guideline than a specific rule, the breakout typically rallies to test the 0.886 retracement at a minimum. Regardless of whether the initial starting point of the 5-0 pattern is violated, this unique technical zone creates an opportunity to buy this violation with a target of the critical 0.886 retracement.