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Tail Closes

Tail closes are price bars that close at either the high or low. Tail closes suggest extreme price action that is to be respected. Therefore, when a tail close occurs after hitting a potential reversal zone, it is prudent to exercise extreme caution.

Efltential levexsaLZone


Reversal Zone

Bullish Tail Close: Tail Close through the Reversal Zone

Bearish Tail Close: Tail Close through the Reversal Zone

When a stock closes at the high or low of the day, it indicates sentiment that is overwhelmingly strong. If you take a moment to really contemplate the meaning of this price action, it indicates that the majority of the participants trading the stock are extremely biased in one direction. It is almost common sense to wait for an obvious reversal signal in this situation because of the strength of the price action. Therefore, a tail close is a clear signal to step aside and let the market give you the signals of when to enter or exit a trade.

Extreme Price Ranges

Extreme price ranges also reflect a very strong trend. Such overwhelming action signals unusual activity that is to be respected. One way to determine if a price range is extreme is to compare it to the average range. As a rule of thumb, if a stock trades greater than one and a half times its average range, it can be considered extreme. However, it is not necessary to calculate this comparison, because an extreme price range should be practically obvious.

Poten ia] Reversal Zone


Reversal Zone

Bullish Extreme Price Range: Price Bar through the Reversal Zone

Bearish Extreme Price Inge: Price Bar through the Reversal Zone

Although extreme price ranges signal a potentially flawed set-up, I have observed many valid reversals that occur despite such price action. In fact, I believe that the extreme price range frequently can indicate a state of exhaustion. I say this with one condition: the exhaustion must be confirmed by the following price action. If the extreme price range reflects an exhaustive price move, the next price bar should not continue in the same direction. But, if the warning sign is a valid indicator of a flawed set-up, the stock should continue to trade in the same direction. Therefore, it is

important to respect this warning sign. But, it is even more important to observe some type of continuation ofthe price action.

When harmonic set-ups are blown-out, the price action is providing very significant information about the primary trend. Since a potential reversal zone is a critical area to examine, the price action will indicate a great deal about the current trend. In the case of a blowout, the price action will indicate that the predominant trend is very strong, especially if the stock continues beyond the potential reversal zone.

Blowouts actually can be opportunities to reverse the initial trade idea, suggesting that you should "go with the flow," and enter a trade in the predominant trend. Reversing an original trade set-up can be difficult. Specifically, there is an emotional element involved with reversing that may be difficult to overcome. A perceived harmonic set-up that has previous experiences attached to the opportunity suggests that if a reversal has occurred under similar conditions in the past, the same result should occur. When these "expectations" are involved in a failed trade set-up, a degree of attachment and/or bias sets into the psyche that distorts what the market action is actually revealing.

At times, it can be very frustrating to wait for a set-up to materialize, only to have a warning sign develop in the potential reversal zone. In fact, it happens to me very often. Sometimes, I will wait a week or even a month for a significant set-up to complete, only to have the trade negated by a warning sign. However, I have leamed that these signs accurately warn against a losing trade. At a minimum, if I believe that the trade is a fantastic opportunity, I will wait at least one price bar before executing my order.

One Price Bar Rule

The most important consideration when assessing a waming sign is the price action after the stock enters the potential reversal zone. Frequently, stocks will reverse, despite such waming signs. So, it is important to wait for the market to provide some type of confirmation of the reversal.

When a set-up is extremely harmonic - possessing three or more numbers in the potential reversal zone - the opportunity can be still be valid. However, waiting at least one price bar will prevent you fi-om "jumping in front of a mnaway train." As I mentioned before, the principle of continuation will be very indicative of the validity of the reversal. A stock that continues in the predominant trend beyond the potential reversal zone will definitely invalidate the trade. However, if a stock reverses after a

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