Invalid Harmonic Set-ups

The stock market often provides clues to determine fiiture price action. Although anything can happen in the stock market, harmonic set-ups that experience price action that acts completely opposite to what is anticipated usually will provide signals to indicate the flawed nature. This is not to say that a harmonic set-up will not go completely against you -because it can. But, in my experience, the market will provide evidence of "probable future action."

It is important to read these signs that the market offers to gauge the next potential move. After you develop the feel for harmonic price action, you will be able to determine how a stock "should" act within a potential reversal zone.

The Warning Signs Blowouts

Blowouts, as I refer to such price action, occur when the potential reversal zone is completely violated. Potential reversal zone blowouts are associated with three primary warning signs: price gaps, tail closes and abnormally large price ranges. It is almost uncanny how frequently these warning signs occur to warn against a potentially flawed harmonic reversal zone. But, they are reliable indicators of an invalid set-up.

As I mentioned previously, harmonic areas are excellent opportunities for defining profitable stocks, but they do not work all of the time. It is essential to study the price action in the potential reversal zone, especially if the area contains several harmonic calculations within a close range. As you examine these situations, let the market provide the clues ofits next move. When warning signs develop, they act as clear signals that the area is not a good opportunity.

Although warning signs will signal a potentially flawed set-up, it is also important to examine the following price action. Since blowouts represent strong price action, the stock should continue to trade in that direction.

This principle of continuation is extremely important because it will define the significance of the warning sign. For example, if a stock gaps up on the open and finishes with a bullish close, this would indicate a strong stock. Due to the strength of this price action, you might expect the stock to move higher. However, if a stock does not move higher after such a move, the stock could be considered potentially weak. Therefore, warning signs should exhibit some type of follow through to confirm the price action.

Price Gaps

It is very common for price gaps to occur in a potential reversal zone. A price gap occurs when the price action opens beyond the previous close, leaving an open area where no trading has occurred. A price gap in a potential reversal zone indicates that the set-up is to be treated with extreme caution. It is important to respect an extreme sign like this because a price gap indicates a significant change in sentiment.

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Potential Reversal Zone

Bullish Gap: Price Gap through the Reversal Zone

Bearish Gap: Price Gap through the Reversal Zone

I believe that a price gap in the potential reversal zone occurs most frequently and is the strongest of all of the waming signals. A price gap is an extremely significant indicator of an invalid set-up and has kept me out of many bad trades.