In short the basic setup consists of the following:
A series of nine consecutive bars that close higher or lower than the close 4 bars earlier. (Bars are “period” — periods can be minute, hourly, daily, weekly, monthly, etc…).
9 consecutive closes “higher” than the close 4 bars prior records a “sell setup” and 9 consecutive closes “lower” than the close 4 bars prior records a “buy setup.”
A “sell setup” is “perfected” when the the high of bars 6 and 7 in the count are exceeded by the high of bars 8 or 9 and a “buy setup” is likewise “perfected” when the low of bars 6 and 7 in the count are exceeded by the low of bars 8 or 9. A “perfected” setup tends to be a better indicator, as unperfected setups often are perfected at a later date.
After a setup records, a reaction in opposite direction has a higher probability during the next 1-4 bars.
Note that a setup does not guarantee a reaction in the opposite direction… for instance, if momentum is too strong in the trend direction, a reaction may be muted. A sideways move or continuation of the trend following a setup indicates a weaker setup. This is why it is good to employ strong risk management when trading setups (i.e. stops).
Lastly, it’s good to know that setups often often occur within a “trend” and either offer a brief counter-trend trade or an opportunity to get in on the trend.