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

The Harmonic Trader (Excerpt 3)

By Scott M. Carney

Library of Congress
Cataloging-in-Publication Data

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From a Declaration of Principles Jointly Adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations.

Copyright Scott M. Carney, 1999

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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 stock’s 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 rule of thumb, which states that most prior gaps get filled – sooner or later. Although I can not provide exact statistical evidence to prove this rule 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 of using a prior gap to confirm a potential reversal zone. The stock formed a bearish Gartley that had three harmonic numbers and a prior gap within a very tight area.

The Gartley pattern was very clear. The potential reversal zone consisted of: 1. .786XA at 68; 2. AB=CD at 69 13/16; 3. 1.27BC at 69 3/4. The prior gap converged nicely in this area, which was filled at 68 1/4. With all of these numbers in such a tight area, the probability for a reversal was quite high.

Price gaps are significant because they mark a place in the history of a stock’s price action, where mass perception of has changed in a dramatic fashion. This price action is especially significant when a gap is followed by a wide price range and/or tail close. So, when an unfilled gap is in the same price area as a potential reversal zone, it is important to recognize this as an especially significant opportunity.

The next chart also illustrates the importance of prior gaps in a potential reversal zone. Broadcast.com completed a very bullish Gartley that possessed a very harmonic area. The stock possessed five harmonic calculations and prior gap in this area.

It has been my experience that prior price gaps generate some type of bounce. In combination with a potential reversal zone, prior gaps can provide excellent trading opportunities. The price action can be extreme in these areas, as reversals frequently occur sharply after filling the prior gap. But, these opportunities are especially significant.