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80

With such a major retracement, I was confident to wait for this area. I referenced an intra-day chart to see if any short -term projections were converging in this area. Interestingly enough, a clear 1.618 projection converged in this mid-90s area. It was projected at 95 1/2. The following chart shows the intra-day projections.

AMERICA ONLINE (AOL): 15 MINUTE

1.27 & 1.618 PROJECTIONS

<2fffigCterts.com

11 I 3U11 1 3T11 1 3F11 1 11 1 3T11 1 3H11 1 3T11 1 3F11 1 3

This intra-day chart confirmed the mid-90s area, as the optimal execution point for this potential reversal zone. I definitely wanted to wait for the stock to hit the 1.27 of XA at 97 because I thought the Butterfly was a very harmonic pattem. Also, the combination of the 50% retracement with the intra-day 1.618 projection defined a very significant area.



Although there were several harmonic calculations in this area, AOL sold off sharply on the first day it hit the potential reversal zone. In fact, the stock gapped down on the open, and it sold off over 11 points at one point. Due to these waming signs, I avoided the trade, and I waited for some confirmation of a reversal. The next day the stock experienced another significant decline. I have included the following hourly chart of all of the harmonic calculations in the potential reversal zone.

AMERICA ONLINE (AOL): HOURLY

PRICE ACTION IN THE , POTENTIAL REVERSAL ZONE

•tl

ab=cd@1043/4

AB=CDi@103 5/8

- 1.618bc @T013/4

- 1.27XA@97 = 50%9?3/8

1.618 HOURLY @ 951/2

<&BigCharts.conn

8 6 4 2

As you can see, the stock sold off 8 1 , after it entered this potential reversal zone. The most important number in this trade, 1.27XA, was calculated at 97. The 1.618bc projection of the Butterfly complemented this area, since it was calculated at 101 3/4. The problem with this set-up



was the two other AB=CD pattems that converged aroimd 104. These completion points were several points above the lower range ofthe potential reversal zone. But, the price action clearly blew out this area. Referring to the hourly chart, AOL declined sharply and it never provided any reversal clear signals. The waming signs on these days would have kept you out of the trade.

As I was following this set-up, I thought that the stock was going to head much lower. But, AOL bottomed on the third day at 89 1/2 and started to rally. The day after the stock completed its reversal, it gapped up on the open and started a strong uptrend. In fact, the stock rallied nearly 25 points in the three days after the reversal.

Although the previous hourly chart may seem confiising, the convergence of all of these harmonic calculations clearly indicated that this was a very significant area. The combination of intra-day, daily and weekly numbers is an excellent means of determining the optimal execution point, as this example illustrates. It is important to know these other harmonic calculations, as they will gauge the price action on various time frames.

In this example, America Online possessed a very harmonic set-up on three time fi-ames. When such a situation occurs, it is important to understand that the stock is in a very critical area. These critical areas will identify very profitable opportunities, and provide assurance of valid reversals.

Prior Gaps in the Potential Reversal Zone

Once a potential reversal zone is identified, it is important to look for any prior gaps in a stocks price action that corresponds with this area. Often, a prior gap will get filled when it occurs within a potential reversal zone. I utilize a mle of thumb, which states that most prior gaps get filled -sooner or later. Although I can not provide exact statistical evidence to prove this mle valid, I can state upon observing thousands of charts that prior gaps are filled more than they are not. Therefore, prior gaps provide even further indication of a potential reversal.

The chart on the next page of Applied Materials demonstrates the effectiveness ofusing a prior gap to confirm a potential reversal zone. The stock formed a bearish Gartley tiiat had three harmonic numbers and a prior gap within a very tight area.



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