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65

It is important to note that the stock hit the 1.27 projection of XA the day before it reversed. The stock experienced a waming sign in the form of an extreme price range. In fact, the stock was up nearly 4 points at the high ofthis day. Therefore, you probably should have waited an extra day before executing the trade.

I have included the following enlarged chart of the price action in the potential reversal zone. On the first day the stock hit the potential reversal zone, the price action was quite strong, as US Airways was up several points.

1.618 @ 63 7/8 1.27XA@621/2

1.27AB=CD @6115/16

USAIRWAYS (U): DAILY BEARISH BUTTERFLY

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PRICE ACTION IN POTENTIAL REVERSAL ZONE

64 63 62 61 60 59 58 57 56 55 54 53 52 51 50 49

1.5 1

21 22 23 24 28 29 30 31 99

11 12 13 14 15 19 20 21 22 25

Despite this extreme price action, the next day tested the upper range of the potential reversal zone and began to decline. Also, the formation of the bearish candlestick - an inverse hammer - in this area indicated that the stock was having trouble continuing its rally. This is particularly significant



since the prior day was so bullish. When the price action does not continue higher - especially close higher than the days open - in a harmonic area, this should indicate that a reversal is at hand. The third day confirmed the reversal, as the stock gapped down on the open and sold off sharply.

The next chart shows that Apple Computer completed a clear bearish Butterfly in February 1999. There were several numbers that converged in the potential reversal zone. The 1.27 of the XA leg was projected at 47 7/8, and the stock reversed approximately a 1/2 point shy of the 1.27 projection of XA, topping out at 47 5/16.

APPLE COMPUTER (AAPL): DAILY BEARISH BUTTERFLY

OBigCharts.eom

There were two other harmonic numbers that converged in this area that defined the potential reversal zone. The 1.618 projection of was calculated at 47 11/16. The 1.27 altemate projection of the AB=CD was calculated at 47 1/4, which was 1/16 of a point below the actual reversal.



This execution was a bit tricky, since the stock reversed a 1/2 point below the 1.27 projection of the XA leg. Although the stock reversed at the low end of the range, it did hit the potential reversal zone. I would have preferred to see the stock hit the 1.27 before executing a trade. But, this reversal was very close.

In this situation, if a stock seems to be reversing shy of a critical projection, you must wait for a clear reversal. Apple began to breakdown, as in the days following the reversal the stock started to make lower lows. Although this would have been a difficult execution, the pattern was so clear that it was a valid set-up.

This chart of Haliburton shows a clear bearish Butterfly pattem. The stock possessed three numbers in a tight potential reversal zone that yielded quite a reversal.

HALIBURTON (HAL): DAILY BEARISH BUTTERFLY

0BigCharts.com

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