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68 The following weekly chart of Dupont illustrates the significance of the 1.618 bearish Butterfly as a powerful reversal signal. Dupont rallied sharply throughout most of 1998. The stock completed a clear bearish Butterfly in May 1998 and lost 40% ofits value over the following nine months. DUPONT (DD): WEEKLY 1.618 BEAMSH BUTTERFL\} Volume ® BigCharts.com 30 20 10 J fl SON 98 F fl H J J fl SON D 99 F tl fi H J J The stocked formed a nice Butterfly pattem and reversed after hitting the 1.618 projection ofthe XA leg. In this area, there were two harmonic projections that defined the potential reversal zone. The 1.618 was at 81 13/16, while the 2.618 projection of was at 84.8125. The stock reversed in this area at 84 7/16.
When an obvious pattem like this develops, you must be prepared to sell. At the first opportunity to sell at the 1.27 projection of XA around 75, the stock experienced a strong rally, as evidenced by the extreme price ranges. Although the stock did sell off a few points after hitting the 1.27 projection, the 1.618 between 82 and 83 provided a better selling opportunity. The following enlarged chart clearly illustrates the reversal in the potential reversal zone. Although the price action formed a bearish price bar on the first week it hit this area, the stock was extremely strong due to the gap up on the week. So, you probably should have waited for a clear reversal sign. Two weeks later, Dupont started to reverse. Within the next several weeks the stock clearly broke down, especially since it made new weekly lows. This reversal was very significant because the pattem was so clear, and the stock lost over 30 points during the next several weeks. 2.618BC@ 8413/16 1.618XA@8113/16 DUPONT (DD): WEEKLY BEARISH BUTTERFLY Volume PRICE ACTION IN THE POTENTIAL REVERSAL ZONE 86 34 82 80 78 74 72 70 63 66 64 62 60
The next weekly chart of Nike is an excellent example of a 1.618 bearish Butterfly. The stock formed a clear pattem that reversed almost exactly off the projection of the 1.618 XA leg. NIKE (NKE): WEEKLY L618 BEAMSH BUTTERF llll 30 20 15 10 3 Feb Har May Jun Jul Rug Sep Oct i*w Uee 99 Feb Mar Apr Hi Jun Jui ftgg Sep Oct The potential reversal zone possessed two numbers between 63 5/8 and 66 1/8 for an excellent opportunity to take profits or enter a short position. The 1.618XA projection was calculated at 66 1/8, while the 2.24 of the leg complemented this area at 63 5/8. The stock hit this area and reversed ideally. Nike topped at 66 15/16 and started to break down in the weeks following the reversal. As the previous examples demonstrate, the 1.618 projection of the XA leg is the most critical number in this set-up. But, it is not uncommon for the price action to hit the other harmonic calculations. Therefore, it is imperative to focus on the entire area to determine the validity of the trade.
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