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61

Butterfly depends more on the current price action within the potential reversal zone.

In general, the stop loss for a Butterfly should be larger than the other pattems. Sometimes, depending on the set-up, the stop loss in a bullish pattem can be more than two points below the potential reversal zone. The key in defining the stop loss limit is really a personal question and is usually different for everyone.

Essentially, it is the amount a person is willing to risk to see if the trade set up is going to work. One person might be willing to risk more than another based upon their perception ofthe opportunity. In this set-up, the CD leg can become extended and sell off past the harmonic projections. Therefore, it is important place the stop loss below the potential reversal zone in the bullish Butterfly.

Ideal BulUsh Butterfly

bullish butterfly ab=<cd buy atd!

The ideal bullish Butterfly occurs frequently in stocks that are making important bottoms. In an ideal set-up, a bullish Butterfly will be found in an



all-time low area. I have seen this pattem in many stocks that seem to be extremely weak but reverse significantly.

When a stock does reverse in an all-time low price area, the following rally is often incredibly strong. As I have previously stated, this is probably the most powerftil of all of the pattems. The following examples will illustrate the effectiveness of this pattem in definmg important reversal points.

The following weekly chart of Novellus clearly illustrates a very harmonic bullish Butterfly. The potential reversal zone included several harmonic calculations, including a major altemate .786AB=CD.

The most important number in this set-up, the 1.27 of the xa leg, was projected at 22 9/16. The 1.618 of the leg complemented this harmonic projection at 20 1/16. The smaller ab=cd within the Butterfly coincided very close with the 1.27, which was projected to complete at 23 1/2. As Novellus declined into this area, you should have prepared to buy the stock.

NOVELLUS (NVLS): WEEKLY BULLISH BUTTERFLY

SON D98Fn Rn J

15 10 5

SON ])99Frifif1 JJ



Interestingly enough, there was a larger AB=CD altemate projection that was in this area, as well. The .786 of the AB leg resulted in a completion of the CD leg at 20 5/8. Although this number is not as significant as the 1.27 of XA, it does provide further evidence of a harmonic set-up just above 20.

Another indicator of the reversal was the price action as the stock entered into the potential reversal zone. After declining quite sha ly for several weeks, Novellus started to stabilize. On the next enlarged candlestick chart, the weekly price action revealed that a reversal was at hand.

NOVELLUS (NVLS): WEEKLY BULLISH BUTTERFLY PRICE ACTION IN THE

POTENTIAL REVERSAL ZONE

L27XA@22 9/16 786AB=CD @ 20 5/8

ab=cd@231/2

Volume I

1.61 SBC .jfBjgChuns. com

@ 201/16

50 48 46 44 42 40 38 36 34 32 30 is 26 24 22 20

20 13

mill

Fiug 16 30 Sfp

lllll

Sea 20 Oct

A significant aspect of this reversal was the doji that formed the week before the stock broke out. A doji price bar occurs when a stock opens and closes at the same price. In a potential reversal zone, it is an excellent indicator of a change in trend.



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