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75 Once the first two drives are established, the third drive can be projected to determine the optimal entry point for the trade. In this case, the 1.618 of the prior thrust would have projected a potential entry point around 5 1/2. This converged with the 2.24 projection, which was calculated at 5 7/8, The stock quickly reversed shy of these two numbers, tuming around at 6 1/2, and rallied very sha ly over the next six months. Although the stock reversed above the two projections, the price action clearly indicated a reversal in the works. The following candlestick chart shows how the stock bounced just above this area. cendant (cd): daily bullish three drives price action in the potential reversal zone .2.24 @ 5 7/8 12V2 10V2 91/2 9 71/2 7 obigchaiti.com 30 Oct 2 12 13 14 15 16 19 20 21 22 23 26 27 Even if you missed buying the stock on the day it bounced, the price action was clearly indicating a reversal. The doji that formed just above the potential reversal zone was very significant. Also, the following few days were very bullish, as the stock bounced sharply, gapping up on the open the day after forming this candlestick. This is a fairly good Three Drives set-up to study. I would have preferred to see the stock hit the projections. Also, I normally do not trade stocks that are under $10. However, Cendant did complete a harmonic pattem that worked out well.
The key to a set-up Uke this is defining your stop loss limit. If you were assessing this pattem as it was forming a Three Drives set-up, you would assume that the third drive would complete near the 1.618 of the second drive. Therefore, you only had to risk a point beyond this area -maybe at 4 1/2 - to see if the pattem was valid. So, this was another example of a harmonic opportunity that required a small loss limit for potentially a big move. Bearish Three Drives At a Major Fibonacci Projection When a Three Drives pattem develops, it often converges with another major Fibbonacci projection from a prior decline. The major Fibonacci projection complements the Three Drives pattem. Ideally, the projection should converge with the completion of the third drive. Lets look at the diagram. BEARISH THREE DmVES AT a MAJOR FIBONACCI PROJECTON: sell AT 3!
This set-up is very harmonic, since a major Fibonacci projection is involved. Although I would prefer to wait for the major projection to be hit, the set-up will generally indicate where the stock will reverse. Lets look at an example. The following daily chart shows how Excite (XCIT) completed a clear Three Drives pattem at an all-time high, which coincidentally converged with a Fibonacci projection from a prior decline. ): daily bearish three drives atamajorhbonacci projection ©bigch arts, com aug sep oct Noy dec 99 feb
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