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66 Haliburton formed a clear bearish Butterfly pattem that reversed ideally after hitting the potential reversal zone. This area possessed three numbers within less than a point of each other. The 1.27 of XA converged exactly at the same point as the equivalent AB=CD, which was calculated at 50 5/8. The 1.618BC projection converged nicely with this area at 51 9/16. The stock hit this tight range and reversed at 51 3/4! This enlarged chart clearly shows the price action in the potential reversal zone. - 1.618BC@519/16 AB=CD&1.27XA@50 5/8 HALIBURTON (HAL): DAILY PRICE ACTION IN THE POTENTIAL REVERSAL ZONE t/olume BigCharts.Miii lllllllll 27 28 29 30 Rug 3 4 5 6 S 10 12 13 16 17 18 19 20 23 24 25 26 27 30 31 4£ 5 4 3 2 1 0 On the first day the stock hit the lower range of the potential reversal zone, the stock possessed a waming sign - an extreme price range. But, Haliburton could not blow out this area, as the stock reversed a few days later. So, even if you waited for a reversal to be confirmed, the set-up indicated an excellent area to be shorting the stock or taking profits.
Butterfly with a 1.618 Projection of xa Since the Butterfly is a very powerful pattem, the predominant trend often exceeds the initial harmonic target at the 1,27. Although the 1.27 might be exceeded, it does not mean that the trade opportunity is to be avoided. When there is a clear pattem existing with other Fibonacci numbers existing beyond the 1,27, the 1.618 of the XA leg should be considered as the next potential target for a trade execution. I have included a special section on the 1.618 Butterfly because it contains several elements that are different than the pattem with the 1.27 projection of XA. A 1.618 calculation of the XA leg will require the use of secondary numbers to project the leg. Also, the 1.618 Butterfly very frequently will require an altemate calculation ofthe AB=CD leg. BuUish 1.618 Butterfly - - BULLISH BUTTERFLY AB<CD AD = 1.618XA BUY AT D! The bullish Butterfly pattem with a 1.618 projection is a very excellent trade set-up. Although this pattem frequently requires the use of secondary Fibonacci calculations, it still is a very harmonic pattem since several numbers converge in a specific area at point D.
The key in gauging this set-up is to observe the price action within the reversal zone. If the price action appears strong, as indicated by the waming signs such as tail closes, price gaps and extreme price ranges, the potential set-up is probably not a good trade opportunity. But, these signs will help to gauge the action around the reversal zone. Sometimes, the price action will exceed the 1.27 decidedly, yet it will fail to hit the 1.618. In these instances, it is important to let the trade go. Such trades are difficult to gauge and they take a great deal of experience to possess the required "touch" to successfully execute. Lets look at some examples. Mirage Resorts completed a nice bullish 1.618 Butterfly pattem in early 1999. The stock made a significant reversal around 13, in an area where several numbers converged. This potential reversal zone clearly supported the stock. MIRAGE RESORTS (MIR): WEEKLY L618 BULLISH BUTTERFLY 20 15 10 5 JflS 0ND97FM ftMJ Jft SOH %? fill JJfi SON B99Ff1
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