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51

The following enlarged chart illustrates the price action in the potential reversal zone very well. As you can see, the stock literally bounced off this area. Although the price action was somewhat strong on the day it hit the potential reversal zone, the stock tumed around quickly in the next few days.

WELLS FARGO (WFC): DAILY

BULLISH GARTLEY

PRICE ACTION IN THE POTENTIAL REVERSAL ZONE

AB=CD COMPLETION @ 33 5/16 .786 XA @ 32 1/8 .

1.27BC@ 3115/16

361/2 36

351/2 35

341/2 34

33l/i 33

2/

OBIgChnns.coiit

20 21 22 25 26 27 28 29 Feb 2

10 U 12 16 17 18 19

When three numbers converge in a specific area like this example, the probability for a reversal is very likely. Wells Fargo reversed exactly off the .786 retracement of the XA leg at 32 1/8. The stock rallied over 10 points in two months - equivalent to over a 30% gain.

Legato Systems is another great example of a stock that formed a very nice geometric pattem and yielded quite a reversal. Although the fmal leg of the pattem became a bit extended, the stock reversed within an unusually large reversal zone that possessed several harmonic numbers within a few points of each other.



©BigCharts.com

LEGATO SYSTEMS (LGTO): DAILY

BULLISH GARTLEY

Sep Oct Nov Dec Feb tiar Apr tlaj Jun

The most important number in the pattem was the .786 retracement of the XA leg, calculated at 36 1/8. The stock exceeded this number by quite a bit. But, the exact AB=CD was projected to complete at 32 7/8. I like to wait for the exact AB=CD to complete within the potential reversal zone before executing a trade. So, I would have waited until the stock sold off to this point before buying. In addition, the stock was exhibiting some extreme price action, so the most prudent action would have been to wait a day to gauge the price action.

The interesting aspect of this trade is that the stock sold off through almost the entire potential reversal zone on the day it hit the area. In fact, on



this day, the stock was down 7 points. The stock opened at 37 3/4, and sold off rapidly throughout the day, closing at 30 1/2. Such extreme price action would indicate that the set-up should be watched closely and wait for clear reversal confirmation.

I have included an hourly chart of that day. As you can see, when Legato hit the first number in the potential reversal zone - the .786 of XA at 36 1/8, the price action was quite strong. The stock continued down most of the day. In fact, the stock did not break above the prior hours high, and Legato continued to make lower lows throughout the entire day.

legato systems (lgto): hourly

r+-l

.786xa @ 361/8

ab=cd @ 32 7/8

1.618bc @ 291/2

© BigCharts.com

lull iiili.i l.iili-l

46 44 42 40 33 36 34 32

0.8 0.6 0.4 0.2

In this situation, you probably should wait a day and follow the stock closely. The stock finished the day near the low, which also would have warned of potential reversal failure. However, the next day the stock gapped up on the open and continued higher. You could have waited a few hours for the stock to confirm the new uptrend and still have been buying very close to a substantial bottom.



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