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18

.618® 7890

DOW INDUSTRIALS: DAILY 1998 PRICE ACTION® .618 &.786 RETRACEMENTS

.786 @ 7460

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8,600 9,530 3,4 0 8,300 8,200 3,100 8,000

7,700 7,600 7,500 7,400 7,300

1 z E

24 26

3 9 10 14 1$ 18 ti 24 23 300ct S 7 $13 15 19 21 23

The major Fibonacci retracements of the .618 and the .786 from the prior years low proved very accurate in gauging the price action. The .618, which was just below 7900, was obviously "blown out" by a sfrong sell-off However, the Dow Industrials found good support at the .786 and reversed nicely from this area. Even ifyou waited for a clear reversal, the support at the .786 indicated that the Dow Industrials established a bottom and that a new uptrend was in place.

These declines will happen again! The stock market will provide you with opportunities like this one in the fiiture. When these situations occur in the future, you must realize their significance and take advantage ofthese opportunities.

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During the markets dechne in the fall of 1998, Disney also suffered a serious beating. The stock was cut in half in less than six months. This weekly chart illustrates the significance of the .786 retracement. The stock reversed off the .786 retracement from a critical low in July 1997 at 17 3/4 (pt. X) to a high in July 1998 at around 42 1/2 (pt. A). Disney declined and then reversed almost exactly at the .786. The .786 was calculated at 23 1/16. Disney declined to 22 1/2 (pt. B) and rallied over 15 points during the next few months.

DISNEY (DIS): WEEKLY .786 BULLISH RETRACEMENT

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On the week Disney hit the .786, the price action clearly indicated a reversal at hand. The reversal was confirmed, since the following week started an uptrend that led to a nice rally over the following several months. You might be wondering (again) how you would know to utilize the .786 as an entry point rather than the .618. I have included an enlarged chart to illustrate the price action at the .618 and the .786.

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3961



.618 @ 271/2

disney (dis): weekly

price action @

.618 & .786 retracements

.786 @ 23 1/16,

36 3S 34 33 32 31 30 29 28 27 26 25 24 23 22

Volume -

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As you can clearly see, the stock sold off sharply past the .618, which was projected at 27 1/4. On the week that Disney hit this number, the selling was quite strong, as evidenced by the extreme price range. Such an extreme decline is a waming sign that the Fibonacci projection is probably not a good point to buy. At a minimum, when a waming sign is observed at a Fibonacci number, you should wait one price bar. In this case, the stock continued to decline the following week.

The stock did begin to reverse after hitting the .786 retracement. The reversal was confirmed the following week, as the stock gapped up on the open and finished with a bullish close. The reversal was confirmed further by the next week, when the stock broke above the previous two weeks highs and closed very strongly.

This is a great chart to study because the stock bounced almost exactly off the .786 retracement. Such harmonic action is no coincidence, as this example of Disney tmly validates the use of Fibonacci numbers in gauging price action.



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