My Fibonacci Reversal Pattern Shows Up in GILD

One of the greatest books I've read concerning technical analysis is "Profits in the Stock Market" by Harold Gartley. Gartley published this book in the 1930s. I was fortunate to find the book in a small investment library in southern California in 1970. The Gartley pattern has become quite popular in recent years and is featured in several charting packages for trading.

I owe a deep debt of gratitude to Harold Gartley because on page 222 he described the pattern that now bears his name. In fact, the pattern is now popularly known as the Gartley 222 pattern. Several books have been written describing this pattern and there are many websites devoted to showing how the pattern works in real time.

In this article, I will walk you through the Gartley 222 pattern. Note that this article is best understood by traders who are familiar with Fibonacci. There are many resources on the internet that can provide you with this basic knowledge.

What is the Gartley Patttern?

The Gartley pattern is an AB=CD pattern that is contained inside a major high and low. This pattern is often referred to as a thunderbolt pattern.

Gartley said that this pattern can be used to pick a potential top or bottom with relative low risk.

Bullish Gartley 222 Pattern Rules

The Gartley 222 Pattern can be applied to both up and down moves. Here are the rules for up moves.

1. Assign a low as point X and then find the corresponding high as point A and proceed to find the formation of the AB=CD pattern illustrated above.
2. It is important that the D point does not lower than X point and the C point is not higher than the A point.
3. Should any of these events occur, another pattern comes into play. This is important because your stop point must be placed slightly above the X point.
4. However, if there is a gap or an extremely wide ranging bar (2 to 3 times normal) it is best to wait several bars before entering the trade. This is common sense because wide ranging bars and gaps are equivalent to a fast moving freight train.
5. The first profit objective would be the .618 of the CD swing and the second profit objective would be the 1.618 of the CD swing. As you can see from the second profit objective a new AB=CD formation has occurred.

All traders know that the market can do only 3 things...go up, down or sideways and it usually does it in AB=CD fashion. The most important part of the Gartley pattern is that the point X to A and AB=CD leg align with the 4 major ratios of the Fibonacci summation series .618, .786, 1.27 and 1.618. In my 45 years of trading I have never found a pattern that is more reliable and found as often on any timeframe as the Gartley 222 pattern.

Gartley 222 patterns work on any timeframe. As you can see from the above chart on the USD/CAD hourly Forex chart the Gartley 222 pattern completes at point D. Your stop level would be the previous low. The first price objective of this move would be near the C level which would be a .618 retracement of the A to D leg. The second price level would come in at the 1.618 level which would also complete a larger ABCD leg. This occurs because the D leg can also be a C leg of a larger move.

Gartley patterns also work across every asset class. The chart of Gilead Sciences (GILD | Quote | Chart | News | PowerRating), an actively traded NASDAQ stock, illustrates a very symmetrical Gartley pattern. As you can see, at point D an AB=CD pattern has completed at a higher bottom which is at the .786 retracement from that bottom. Your first price objective would be the .618 retracement of the CD leg approximately $45.50 per share. The second price objective would be at point D at $49.00 per share.

As you can see the risk/reward ratio on Gartley 222 patterns favors the trader and the probabilities of success are far greater than a coin toss of 50/50.

For more information about how you can apply Larry Pesavento's strategies to your own trading, go to www.tradingtuor.com.