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57 Since these two numbers were very close, you might assume that this would have been a good area to execute a trade. However, the price action was quite strong on this day. So, you might have waited an extra day to execute the trade. The following day lacked any kind of bullish continuation, since the stock failed to make new highs. So, you short the stock on this day. The stock begins to rally and it seemed as if the trade is not going to work out. However, the stock failed to head much higher and it did not break above the initial point at X. This situation underscores the importance of setting your stop loss before you execute the trade. In this case, the stop loss should have been just above point X - around 75. If you did not establish your stop loss above X, you might have covered your short at a small loss since the stock was rallying. But, the stock did not exceed this point. Although it took a little longer than usual for the stock to reverse, your trade would still have been profitable. Warner-Lambert reversed sharply and declined 8 points within the next two weeks. In the ideal Gartley, the congregation of numbers and the AB==CD pattem completion signifies a very harmonic set-up. When the price action hits the potential reversal zone, the individual price bars will indicate the nature of the move. If the reversal zone is not valid, the price action will show some waming signs, such as gaps, tail closes and/or wide price ranges. In the case of a reversal, the price bars should show some type of reversal, and the stock should reverse quickly after hitting this area. Moreover, a close that is past the .786 usually will signify that a reversal probably will not occur. Thus, the harmonic area is not a good trade opportunity. Gartley after a Strong Price Move This pattem is even more significant, if it is preceded by a major price move. Often, after a major price move, the Gartley will begin with a strong counter move, which becomes the X to A leg. The stock will appear to be consolidating, attempting to stabilize before making another strong move. If a Gartley forms after such price action, it has been my experience that this pattem will prove to be a substantial opportunity. In addition, the stop loss limit required in the trade will be relatively small relative to the potential reversal. The primary reason for this powerful opportunity is that a successful reversal will resume the longer-term trend that was established by the initial price move. Lets look at the diagrams.
Bullish Gartley after a Strong Sell-Off The bullish Gartley after a strong sell-off is a difficult opportunity to perceive. When a stock forms this pattem, it might seem as ifthe stock is making lower highs, especially since point is below point A after the initial bounce. However, the pattem is indicating a potential buy at the potential reversal zone. bullish gartley after a strong sell-off ab = cd buy at point d! The beauty of this set-up is that it requires a very small amount of risk to see if the trade will work out. Since this is an unusually good set-up, the potential profit is very large in comparison to the amount risked. The stop loss should be placed just below X. The following examples will illustrate the effectiveness of this special Gartley situation. This chart of America Online is an excellent example of a perfect Gartley after a severe decline. AOL sold off nearly 55 points preceding this pattem. In the following few weeks, the stock stabilized and then reversed sharply after completing a Gartley, as AOL rallied 40 points within the next month.
The potential reversal zone possessed three harmonic calculations that defmed the set-up. The .786 of the XA leg was calculated at 57, which was the exact projection for the completion of the AB=CD pattem. In addition to these numbers, the 1.27 of was calculated at 56. So, the potential reversal zone was between 56 and 57. The stock reversed in this area at 56 3/8, and it rallied almost ten points the within the following two weeks. APPLIED MATEHALS (AMAT): DAILY BULLISH GARTLEY AFTER A STRONG SELL-OFJl It is important to note that the stop loss in this trade was very small. The stop limit should have been placed just below point X around 54. Since the initial point at X was the low from the previous sha decline, it represented significant support. If the stock broke past this point, it would be likely to assume that Applied Materials was breaking down and going lower. But, the stock held above this point and yielded a nice reversal.
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