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In fact, the stock reversed almost exactly off the 1.618. There were actually three important harmonic projections occurring right in this area. They were: 1. The 1.618 projection ofthe XA leg at 13 7/16; 2. The completion ofthe 1.27 altemative AB-=CD pattem at 14 3/8; 3. The 2.24 projection of the leg at 12 3/4. The stock reversed at 13 3/16.

Ive included an enlarged chart of the price action in the potential reversal zone. An interesting aspect of this reversal was the clear support that the stock experienced in this area. The stock stabilized just below 14 after selling off quite steadily for the prior year.

mirage resorts (mir): daily bullish butterfly price action in potential reversal zone

l618xa 2.24

1.27ab=cd 14 3/8

13 7/16

Vol

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Another interesting aspect of this chart was that the stock started a new uptrend the day after hitting the most important calculation, the 1.618 of XA. Even if you waited for a clear reversal, you would have been still buying very close to the bottom.

A set-up that has all of these numbers converging in one area has a good chance of generating some degree of a reversal. Remember, the Butterfly pattem is a very strong signal. A reversal from such a pattem



usually results in a substantial move in the other direction. In this case, Mirage nearly doubled a few months after completing the pattem.

One other note about this set-up, you might be wondering: "How do you know whether to execute a Butterfly at the 1.27 or 1.618 ofXA. My answer to this is: "read the signs." At the 1.27 around 17, Mirage was selling off very sharply, as indicated by the extreme price bar on the day that it hit this area. In fact, the day the stock hit the 1.27 projection of XA, it gapped down on the open.

These waming signs will frequently appear when a stock hits a potential set-up area. When they do appear, you must respect these signs. After letting the trade go at the 1.27, you could wait for another chance to buy at the 1.618, which was just below 14. The reversal zone proved to be a good buying opportunity, as the stock bounced on the day it hit the 1.618.

The next chart is a great example of the 1.618 Butterfly. Pepsi formed a fantastic pattem that yielded quite a reversal. The stock bounced exactly off the 1.618 projection of XA, which was calculated at 27 9/16. The 2.618 of the leg was also close to this number, as it was projected at 27 3/4.

pepsi (pep): daily bullish 1.618 butterfly

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Although the price action was extreme on this day, the stock did clearly reverse. If you waited a day, the stock confirmed the reversal with a few days after the stock bottomed. Pepsi climbed higher in the ft)llowing weeks and never broke the low point established on the reversal day.

Bearish 1.618 Butterfly

The bearish 1.618 Butterfly is a powerfiil pattem. Since the fmal leg can be extended, I recommend waiting for the 1.618XA leg to be reached at a minimum before executing the trade. When the price action is volatile, it is prudent to wait for a clear reversal price bar.

bearish butterfly ab<cd ad = 1.618xa sell at d!

The 1.618 bearish Butterfly is a great set-up when a clear geometric pattem exists. Like the bullish 1.618 pattem, the bearish Butterfly will require that you calculate some projections with the secondary numbers. Usually, the leg requires at least a 2.24 calculation. Also, the altemate projection for the AB=CD pattem - either a 1.27 or 1.618 of the AB leg -occurs most of the time. Lets look at an example.



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