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It is important to note, however, that the stock did not reach the exact .786 retracement. 3Com reversed at 51 1/8, while the retracement was calculated at 51 7/8. I would prefer to have seen the stock hit the .786 before entering a trade. But, this price action is so close to the retracement that I would consider it valid. I am sure at this point your next question is: how do you know? Referring to the chart, 3Com could not continue its rally after falling 3/4 of a point shy of the projection. In fact, the stock started to seriously break down several days after the reversal.

When a stock does not rally through a major Fibonacci retracement, as this example of 3Com demonstrates, this should indicate substantial resistance in this area. The stock moved sideways for over a month without even challenging the reversal high. Even ifyou were still in the stock, the major decline that occurred in the beginning of February 1999 would have confirmed that the new downtrend was in place.

.786 Retracement Summary

In summary, the .786 is a very significant Fibonacci retracement. When a stock is declining, it is a critical area for support before retesting the initial bottom. When a stock is rallying and attempting to retest a recent high, the retracement can act as significant resistance. The key to gauging the .786 as a potential reversal point is to study the price action at the .786 number and assess the following move. The price action around the .786 can provide substantial information regarding the potential ftiture of a stock. Although the .786 is relatively unknown in the investment industry, it is an extremely effective gauge of a stocks price action.



1.27 Projection

The 1.27 is an important primary Fibonacci number for several reasons. It is first area to examine after a stock has moved beyond a significant previous point of resistance or support. In the case of a break out, the 1.27 projection is the first area to either take profits or enter a short position. In the case of a break down, it is the first area for potential support, covering a short position or entering a long position. The 1.27 is the square root of 1.618.

Similar to the .786, the use of the 1.27 projection is relatively unknown in the technical community. In my opinion, the existence of the 1.27 in harmonic pattems serves as a minimum requirement for many trade set-ups to be valid. Although the 1.27 projection is not as well known by technical traders, reversals off the number occur as frequently as the 1.618. Using this retracement will improve your ability to gauge price action and will help you discover more trading opportunities.



Bullish 1.27 Projection

The bulHsh 1.27 projection is an important area to look for potential trade set-ups. When a stock breaks down past its initial starting point (at X), the 1.27 projection is the first place to look for potential support.

bullish 1.27 projection buy atb!

Lets look at some examples, as they will clearly illustrate the importance of the number.

The following weekly chart of Texaco illustrates the 1.27, as a nice area for support. Texaco reversed off almost exactly off this 1.27 projection. The 1.27 projection was calculated at 44 13/16, and the stock reversed at 44 9/16. Also, Texaco reversed on the week it hit the projection.

This projection developed over a year in duration. After the stock broke down past the previous low (pt. X), Texaco accelerated on the downside. Despite this decline, the stock bounced 8 1 off the 1.27 projection.



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