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26

Bullish 1.618 Projection

A bullish 1.618 often occurs in an extreme sell-off. When a stock is declining, the price action can often become over-extended. The 1.618 projection point can identify profitable set-ups, since a stock that reverses off this area frequently provides a nice bounce.

bullish 1.618 projection buy at b!

The following daily chart of General Electric illustrates the bullish 1.618 very well. The stock sold off in October 1998 to a low of 69 (pt. B) and then reversed significantly. The 1.618 projection was calculated at 70 11/16. Although it declined slightly past the projection, it clearly found support in this area.



GENERAL ELECTRIC (GE); DAILY BULLISH L618 PROJECTION

M Jul 9 Oct Nov B?c 99 Feb fter Hay

On the next page, I have included an enlarged chart of the price action, which was somewhat strong on the day the stock hit the 1.618. So, you might have waited an extra day for the stock to confirm the reversal. The stock found support in this area. As you can see, within a few days after hitting the projection the stock gapped up and started to rally, which confirmed the reversal.



general electric (ge): daily

price action l618 projection

l618 projection @ 7011/16

BigCharts.com

22 23 24 25 28 29 30 Oct 2

12 13 14 15 16 19

85 84 83 82 31 80 79 78 77 76 75 74 73 72 71 70 £9

Such bullish price action in the days following the reversal was a good indication of a valid reversal. The stock attempted to sell below the 1.618 projection several times but it was able to stabilize in this area. It is important to note that the stock never closed below the 1.618. Although it tried to sell off past the 1.618 four times, General Electric held firm. Also, after the stock broke out, the price action was very bullish, as it rallied sharply making consistent new highs with positive closes. These signals are substantial evidence of a new uptrend developing.

The next weekly chart of American Intemational Group also illustrates the significance of the 1.618 projection. AIG sold off sharply, losing over 30% of its value over a few months. However, the stock started to reverse the week it hit the 1.618 projection. You might have waited for the reversal to be confirmed, since the stock gapped down the week it hit the 1.618. The reversal was confirmed the following week, as AIG gapped up on the open, and it rallied 8 1 . In fact, the stock was up over 15 points.



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