COPYRIGHT HARMONICTRADER.COM, L.L.C. 2004

Harmonic Trading of the Financial Markets: Volume One

By Scott M. Carney

(Excerpt 3)

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Prior Harmonic Resistance as Support

When the Potential Reversal Zone (PRZ) of a bearish pattern is blown out or violated, the prior harmonic resistance commonly acts as future support when the price action retests this level.

Semiconductor Holder’s Trust (SMH): 10-Minute

The Semiconductor Holder’s Trust (SMH) blew out this Deep Bearish Crab on the 30-minute chart. After gapping well above the PRZ on the open, the SMH retraced a good portion of the initial pop. The price action refilled the upside gap and bounced in the area where prior harmonic resistance acted as clear support. The intra-day Bearish Butterfly was blown out after gapping past the Potential Reversal Zone (PRZ) on the open of the trading, the day it tested these numbers.

The following chart shows the price action in the prior Potential Reversal Zone (PRZ) of the blown out Bearish Butterfly. After completely violating the prior bearish set-up, the SMH retraced some of the rally, finding support in an area of prior harmonic resistance. It is important to note that the SMH filled the intra-day gap in the same area as the prior resistance. These situations are common and frequently define nice short-term trading opportunities.

Although these prior PRZs should be utilized with other current patterns to define trading opportunities, this phenomenon within the realm of Harmonic Trading techniques is extremely effective. These situations are most commonly found when a pattern has been clearly violated. Despite these failed pattern set-ups, prior PRZs can provide a great deal of information regarding the potential direction of future price action that might otherwise be overlooked.

The concept of prior blown out PRZs acting as an opposite technical level is founded in the principle that harmonic patterns are primarily a “signpost of future action.” I initially discussed this in The Harmonic Trader. Essentially, the critical information for the validity of patterns is revealed by the price action in the Potential Reversal Zone (PRZ). Although valid patterns are quite accurate and identify excellent trading opportunities, there are many cases where the predominant trend overwhelms the anticipated completion area. Despite the failed reversal, the distinct price action at the completion of a pattern frequently possesses extraordinary behavior that acts as a clear signal for the continuation of the predominant trend.