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72

started a clear uptrend. Gateway repeatedly closed higher and within a few weeks the stock rallied substantially.

The bullish Three Drives frequently indicates where potential reversals can develop. The pattem should be clear, as these examples have demonstrated. The pattem should also possess a nice symmetry in both time and distance. It is important to not force the pattem. If the pattem is not obvious, it is probably not a valid signal. However, clear pattems like these prior examples do materialize frequently, and they will really stick out on a price chart. Therefore, it is important to study these previous examples, as ideal set-ups for future opportunities.

Bearish Three Drives

In the same manner as the bullish pattem, the bearish Three Drives is a very clear pattem. When a stock forms three distinct price thmsts, especially after an extended rally, this pattem will indicate a potential reversal at hand. Lets look at the illustration.

bearish three drives: sell at 3!



This seems like a very simple pattem. However, stocks frequently form this pattem that signals an important reversal. The pattem should stick out at you in the same manner as the diagram illustrates.

Bearish Three Drives Stop Loss

The bearish stop loss is a very subjective limit. Since the Three Drives is such a clear pattern, any substantial breakout above the third drive would negate the pattem.

i i f I I f 1

BEAmSH three DRIVES WITH STOP LOSS: COVER ABOVE 3!

As with most reversals, if the pattern is valid, the reversal should occiu-relatively quickly. Once the three drives are identified, the potential reversal zone should stop the prevalent trend and the price action should not exceed this area.



Ideal Bearish Three Drives

Similar to the bullish pattem, the bearish Three Drives will be a very clear pattem. In fact, I believe that bearish set-ups occur more frequently and are often more symmetrical. Lets look at the following illustration.

bearish three drives: sell at 31

In my opinion, a bearish Three Drives seems to stick out even more than a bullish pattem. Perhaps, a stock that is rallying sfrongly is more appealing than one that is selling off? Whatever the reason, the bearish pattem should be very clear. The first two thmsts will form on a price chart and then you will calculate the completion of the third thmst. Lets look at an example.

The following chart of Rambus Software shows an ideal Three Drives pattem that was very symmetrical. Each thmst completed at the 1.27 projection. In fact, the third drive reversed after exceeding the 1.27 projection by less than a point. The potential reversal zone for this set-up was at the 1.27 projection of the prior drive calculated at 109 1/4. If you were looking to short this stock, when it reached 109 you should have been preparing to sell.



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