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62

It is important to note that this pattem developed during most of 1998. When such a lengthy pattem materializes, a valid reversal will often yield a significant move. This is a very nice set-up because there were four harmonic calculations converging in the low 20s. Clearly, Novellus reversed quite nicely off this area. Even if you waited a week or two for a clear reversal price bar, the potential reversal zone identified a significant bottom that yielded a fantastic move over the following six months.

The next chart illustrates the pattem well, as Egghead.com completed an ideal bullish Butterfly that possessed several harmonic numbers in a very specific area.

EGGHEAD.COM (EGGS): DAILY BULLISH BUTTERFLY

26 24

22 20

18 16 14

Volume

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IUhlliiiin.i.Hlllil

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The potential reversal zone for this pattem was projected between 11 3/16 and 13 1/8. The most important number, the 1.27 of the XA leg was projected at 12 15/16, while the 1.618 of the leg was calculated at 13 1/8. Another important harmonic calculation was a major AB=CD pattem that was projected to complete at 11 3/16. In fact, this major AB=CD contained a smaller ab=cd.

Although the smaller ab=cd required an altemate 1.27 calculation, it was still within a point of the larger AB=CD. The 1.27 of the ab leg resulted in the projected completion at 12 1/8. So, these four numbers defmed a potential reversal area that was within 1 15/16 points. The stock hit 12 and reversed sharply. This enlarged chart clearly shows the bullish price action in the potential reversal zone that started the new uptrend.

EGGHEAD.COM (EGGS): DAILY BULLISH BUTTERFLY PRICE ACTION IN THE

POTENTIAL REVERSAL ZONE

1.27XA@ 12 15/16 = 1.27ab=a@121/8

1.618bc@ 131/8

OolUBie

AB=CD@113/16

24 23 22 21 20 19 19 17 16 15 14 13 12

&BigChaft&.com

16 17 18 19 22 23 24 25 26 t1in 2

10 U 12 15 16 17 18 19



It is important to note that the stock hit every number in the potential reversal zone, except the completion point of the major AB=CD, all in the same day. Another interesting aspect ofthis set-up is that the stock clearly reversed on this day. When a stock reverses with such a bullish close -above the open and the prior days close, you must realize that this price action is significant. It should indicate that the stock has bounced and completed a valid reversal.

The stop loss in this situation was not that difficult to determine because there were so many harmonic numbers converging in a specific area. I believe that the major AB=CD served as a key area to determine the validity of the trade and essentially defined the stop loss limit.

Since the Butterfly pattem indicated a potential buying opportunity between approximately 12 and 13, the stock should have reversed in this area. However, the addition of the major AB=CD suggests that the stock could reverse somewhat lower. Therefore, your stop loss probably should have been placed below the completion of the major AB=CD - maybe around 10 1/2.

The stop loss could have been even lower due to the volatility of the price action. I think if the stock declined past 10, the set-up would have been invalidated. However, the stock never tested this area and bounced 1 , as EGGS doubled within a month after reversing.

When you observe the combination of two pattems converging near each other like this, you must assume a high probability for a reversal. Although you probably had to risk a greater loss limit, the potential reversal in these situations can be quite significant. It is important to recognize these opportunities as more harmonic than usual, and can be potentially a more profitable set-up.

The next chart of Broadvision clearly illustrates the significance of the pattem. The stock completed an ideal bullish Butterfly in October 1998 and rallied 700% in the following six months. Incredible! Butterfly pattems are very strong reversal signals. When they do work out. Butterfly pattems can be very profitable opportunities!

This pattem developed near an extreme price level (all-time low) and the set-up possessed all of the elements of an ideal Butterfly. This pattem was a very ideal set-up because the potential reversal zone included several numbers just below 11. The 1.27 of XA was projected to complete at 10 3/4. This number was complemented by the 1.618 of at 10 15/16 and the 1.27 altemate AB=CD at 10 7/8.



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