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The Great Gartley Controversy It is probably the best-known Harmonic pattern in the trading
community—the Gartley. Although many have written articles on this
pattern, the origins of the Gartley pattern range from erroneous to
downright misinformation. H. M. Gartley first outlined the basic
structure of this pattern in his book Profits in the Stock Market
(Lambert-Gann Publishing, 1935) on
page It is important to note that others have assigned a variety of
Fibonacci ratios to the framework of the Gartley pattern. However,
they have used a large gamut of Fibonacci numbers at the D points,
essentially labeling any AB=CD pattern as a Gartley. This
interpretation assumes that any reversal is valid if it completes
at a 0.618 or a 0.786 This controversy was one of the earliest challenges that I faced
when I initially refined the pattern. I argued with many people
that “all Gartley patterns are not the same.” If
anything,the most effective Gartley
pattern required an exact specification of Fibonacci ratios to
validate the structure. Although the general structure has been
outlined previously, it was not until The Harmonic Trader was
released in 1999 that the exact rules for specific retracements of
the The Potential Reversal Zone (PRZ) of a Gartley possesses several other elements that differentiate the structure from other patterns. The pattern should possess a distinct and equivalent AB=CD pattern that converges in the same area as the 0.786 XA retracement. In fact, the completion of the equivalent AB=CD pattern and the 0.786 retracement are minimum requirements for a valid Gartley. Frequently, the 0.786 XA retracement overlaps the AB=CD in the PRZ. In these cases, this convergence typically represents the defining level of the PRZ. The BC projection is another specific condition to validate the structure, and it must not exceed a 1.618. Although the BC projection is a less significant number in the PRZ than in other patterns, the 1.618 limit helps to differentiate the Gartley structure. Typically, a BC extension greater than a 1.618 is found in Bat structures. Regardless of the required numbers in the PRZ, the Gartley must possess a precise 0.618 B point retracement to validate the structure. In fact, the Gartley pattern requires the most precise B point alignment of all the harmonic patterns to define the best trading opportunities. Gartley Pattern Elements: · Precise 61.8% B point retracement of XA leg. · BC projection must not exceed 1.618. · Equivalent AB=CD pattern is most common. · 0.786 XA retracement. · C point within range of 0.382–0.886 retracement. It has been my experience that anything less than the ideal Fibonacci alignment for the Gartley usually results in “deeper” corrective structures, favoring a Bat pattern completion. Although this strict application of the Gartley alignment reduces the number of pattern matches, it is critical in identifying valid patterns and effectively differentiating these two similar structures. It is important to note that the Gartley pattern is simply one type of “M” or “W” Elliott Wave corrective pattern. Although similar in structure, the Bat pattern is a distinctly different entity, utilizing other rules to define the setup. Such specification of price structures, quantified by Fibonacci calculations, is essential in Harmonic Trading. In terms of the Gartley pattern, the setup that yields the most valid reversals is the one illustrated in The Harmonic Trader. As with all harmonic patterns, the specification of Fibonacci points within each structure is extremely critical in determining valid trading opportunities. The Gartley pattern exemplifies the necessity of such specification, as the structure frequently resembles a Bat pattern as it completes. On a final note about harmonic patterns, The Harmonic Trader
outlined many unprecedented strategies that distinguished patterns
based upon specific price point alignments. This differentiation
increased the effectiveness and served to demystify the confusion
of the overall application of these methods. Again, I must
emphasize that although The Bullish Gartley A distinct AB=CD and a 0.786 retracement define the Potential Reversal Zone (PRZ) in the Bullish Gartley (see Figure 6.1). However, these conditions are valid only with a 0.618 B point retracement of the XA leg. Figure 6.1 The BC projection should complement the other numbers in the PRZ, as a 1.13, 1.27, 1.41, or 1.618 extension should converge in the same area. It is important to note that the Gartley does not utilize any BC projection that is greater than a 1.618. Any BC projection that is greater than a 1.618 is usually found in Bat structures. Again, it is important to point out that the “0.382;0.886” Fibonacci retracement range for the C point can be any of the Harmonic Trading ratios that fall between these two constraints. Therefore, the C point can be 0.382, 0.50, 0.618,0.707, 0.786, or 0.886. Newmont Mining (NEM): Weekly This first example of a weekly chart of Newmont Mining (NEM)
illustrates the ideal Bullish Gartley elements (see Figure 6.2).
Starting with a precise 0.618 B point alignment to validate the
structure, the distinct AB=CD pattern completion point at 19.30
converged closely with the Figure 6.2 The chart in Figure 6.3 of the
price action in the PRZ shows an ideal reversal after the
1.41 Figure 6.3 Although this concept may sound repetitive, it is important to
emphasize the difference of a Gartley structure versus a Bat
pattern. The most important element that differentiates
this Standard and Poor’s 500 June 2003 Mini-Contract (ES_M9): 5-Minute The ES formed a distinct Bullish Gartley on this 5-minute chart. This was a nice structure with an ideal alignment of harmonic numbers that defined a distinct intra-day PRZ in the 920 area. (see Figure 6.4). Figure 6.4 The overlapping of the AB=CD and the 0.786 retracement defined the critical area within the PRZ, as the ES reversed sharply after testing this area. It is important to emphasize the convergence of these two numbers in the Gartley PRZ. Although I prefer to wait for the entire range of harmonic numbers to be tested in most patterns, the Gartley frequently reverses after testing the AB=CD completion point and the 0.786 retracement. Not to mention, the convergence of these numbers at the 920 level clearly defined critical intra-day harmonic support. NASDAQ 100 September 2003 Mini-Contract (NQ_U3): Daily The September 2003 NQ Mini-contract formed this distinct Bullish Gartley on the daily chart, marking the beginning of a huge rally. This pattern possessed a distinct structure with an ideal alignment of harmonic numbers that defined a distinct PRZ between 1203.40 and 1213.50 (see Figure 6.5). Figure 6.5 The convergence of the AB=CD completion point and the 0.786 XA
retracement were the defining elements of the PRZ, as the contract
reversed sharply after testing this area. Although the 1.41 BC
projection complemented the PRZ, it was not tested. This
exemplifies Dow Jones Industrial Average Tracking Stock (DIA): Daily The Dow Diamonds formed this Bullish Gartley on the daily chart (see Figure 6.6) with three numbers in a tight range between 118–120. The pattern possessed a distinct structure with a perfect 0.618 B point retracement. Figure 6.6 This was another situation where the Gartley PRZ was defined by the convergence of the AB=CD completion point and the 0.786 XA retracement. Although the BC projection marked the low at $118, the convergence of the AB=CD completion and the 0.786 retracement identified the most important area in the PRZ between. This was an important structural pattern for the Dow Diamonds, as it confirmed the critical bear market low. Microsoft (MSFT): 60-Minute After a severe decline, Microsoft consolidated over the course of several sessions to form a distinct Gartley on this 60-minute chart (see Figure 6.7). Figure 6.7 The B point retracement reversed close to the 0.618 XA
retracement, establishing the structure of the pattern. The AB=CD
completion point, the 0.786 XA retracement, and the
1.41 The Bearish Gartley Pattern The Bearish Gartley structure is principally identified by a
0.618 B point retracement of the XA
Figure 6.8 Standard and Poor’s 500 Index (^SPX): Weekly This first example of a Bearish Gartley was incredibly significant for the financial markets. The Standard and Poor’s 500 Index completed this Bearish Gartley on the weekly chart at the index’s all-time high, marking the beginning of the three-year bear market. The distinct AB=CD pattern completion point and the 0.786 XA retracement were complemented by the 1.27 BC projection, defining the area just above the 1500 level as critical resistance (see Figure 6.9). Although the price action exceeded the top end of the range, the reversal occurred the week after the price action tested the entire range of the PRZ. The chart in Figure 6.10 shows an ideal reversal after this complete test. The action after the entire PRZ was tested exemplifies an ideal reversal of a valid pattern. In this case, the S&P 500 stalled at this harmonic resistance and continued lower in the weeks following the reversal. Figure 6.9 Figure 6.10 Swiss Franc (CHF_A0-FX): 60-Minute The next example of a Bearish Gartley in the Swiss Franc shows another excellent harmonic pattern in the currency markets (see Figure 6.11). The 60-minute chart possessed a distinct pattern, clearly defining the critical harmonic resistance. The pattern formed the required Fibonacci alignment to validate the structure, especially the precise 0.618 B point. The price action stabilized nicely after testing the entire PRZ and the pattern represented an excellent intra-day selling opportunity.
Figure 6.11 Although the 0.786 XA retracement and the 1.618 BC projection converged in the low range of the zone, the reversal did not occur until the AB=CD was completed. Again, this example underscores the importance of the AB=CD pattern as a mandatory requirement in the Gartley PRZ. The following chart of the price action in the PRZ shows the resistance as defined by the AB=CD completion point (see Figure 6.12).
Figure 6.12 The price action clearly stalled in the zone and rolled over decisively after testing all the numbers at the pattern’s completion point. The distinct structure provided a clear signal of an impending reversal. These situations materialize in all markets on any timeframe. However, harmonic patterns in the currency markets frequently provide even more defined opportunities, as these intra-day setups continually materialize. Although smaller intra-day intervals provide similar trading opportunities, the larger patterns on 15-minute and 60-minute timeframes tend to allow for more deliberation and to offer clearer reversal signals. United States Oil Fund ETF (USO): 15-Minute The USO formed a Bearish Gartley on this 60-minute chart (see Figure 6.13). The distinct AB=CD pattern completion point and the 0.786 XA retracement defined the 44 area as critical intra-day resistance. The price action reversed immediately after testing all the numbers in the PRZ. The AB=CD pattern defined the top range of the resistance and confirmed the optimal entry point for the trade. Again, it is important to note that the distinguishing element of this example is the precise 0.618 B point retracement that validated the structure.
Figure 6.13 The following chart of the price action in the PRZ shows an
ideal reversal after the AB=CD and the 0.786 XA retracement were
tested (see Figure 6.14). The interesting aspect of this reversal
is the downside continuation that occurred after the reversal was
complete. However, the quick test that occurred at the pattern’s
completion could have resulted in a missed opportunity. When the
price action traded into the PRZ, it reversed on the open of the
next
Figure 6.14 Although execution techniques will be covered later in this book in Chapter 11, “The Harmonic Trade Management System,” this example underscores the importance of executing in the zone. The Bearish Gartley pattern clearly indicated the area just above the $44 level as the ideal entry for the short. When the price action hit the zone, there was a distinct window of opportunity to execute the trade. As I mentioned in the previous chapter, this is another example of the importance of PRICE over TIME. Without engaging into a long-winded debate, the importance of price targets as a determination for the execution of a trade must outweigh the time projections and expectations of the market action. In the case of the USO, the focus should have been on the completion point of the AB=CD pattern. New Zealand Dollar (NZD_A0-FX): 15-Minute The next example in the New Zealand Dollar illustrates the ideal
structure that valid Bearish
Figure 6.15 Figure 6.16 shows the price
action at the completion of the pattern. The rally stalled right at
the numbers and reversed immediately after testing the PRZ. The
distinct change in the nature of the preceding uptrend was the
overwhelming sign that the reversal was valid. The execution of the
short should focus on the entire range of the projected harmonic
resistance, as this example presents an ideal scenario of price
action that reverses ideally from the completion
of
Figure 6.16 The Perfect Gartley The Perfect Gartley should possess the following elements: 1. Precise 0.618 B point retracement of the XA leg. 2. Precise 0.786 D point retracement of the XA leg in the PRZ. 3. Mandatory 1.618 BC projection. 4. Equivalent and Perfect AB=CD (0.618/1.618) with distinct symmetry and time duration for each leg. 5. C point at a 0.618 retracement. Although the ideal Gartley is well defined, a perfect Gartley utilizes the perfect AB=CD pattern (0.618/1.618) structure. The perfect AB=CD is primarily defined by the C point retracement that should be precisely 0.618 of the AB leg. The 0.618 C point retracement sets up the 1.618 BC projection. For obvious reasons, the 0.618 and 1.618 AB=CD pattern represent the most harmonic ratios that are directly derived from the Fibonacci sequence. The perfect Gartley should entail an exact B point retracement. Although the ideal Gartley structure allows only a slight variation of the 0.618 B point retracement, a perfect Gartley should possess an almost exact retracement. Furthermore, the C point should be at a 0.618 retracement. Due to the perfect AB=CD required to validate this structure, the C point is another precise ratio that distinguishes the pattern. Another aspect of the perfect Gartley pattern is the general symmetry and time consideration of the structure, where each leg is exactly equivalent in duration. The Perfect Bullish Gartley The perfect Bullish Gartley pattern is primarily defined by an exact 0.618 retracement at the B point (see Figure 6.17). Although the ideal price action should test the entire range of the Potential Reversal Zone (PRZ), the minimum AB=CD and the 0.786 XA leg still represent the most important numbers in the completion pattern. The structure should be distinct and possess ideal symmetry. In addition, the AB=CD should be a perfect bullish structure with 0.618 and 1.618 ratios at the respective points. The combination of these elements define a remarkably ideal setup with a particularly critical PRZ. Although these structures are rare, they represent the best alignment of all the Gartley variations.
Figure 6.17 Standard and Poor’s 500 Tracking Stock (SPY): 5-Minute The following chart of the perfect Bullish Gartley in the SPY exemplifies the required structure and alignment of Fibonacci ratios to validate the pattern (see Figure 6.18). Starting with an almost exact 61.8% B point retracement, the price action formed a perfect AB=CD pattern that reversed exactly at the pattern’s completion point.
Figure 6.18 The 0.786 XA retracement and the
1.618 BC projection complemented the perfect Bullish AB=CD pattern
to define a tight Potential Reversal Zone (PRZ). These numbers
clearly pinpointed the trade opportunity to buy the intra-day
support in a close 15-cent range just under 87.50 level. Figure
6.19 of the price action in the PRZ shows an ideal reversal
after
Figure 6.19 The SPY declined sharply as it approached the PRZ. Despite this drop, the price action stabilized shortly after the pattern completed and rallied significantly immediately after testing all of the numbers in the zone. In addition, the tight range of the PRZ created a clear make-or- break harmonic support that represented an optimal entry for the intra-day long position. The Perfect Bearish Gartley The perfect Bearish Gartley pattern is defined by an exact 0.618 retracement at the B point (see Figure 6.20). In addition, a perfect Bearish AB=CD and the 0.786 XA leg must be complemented by a 1.618 BC projection.
Figure 6.20 British Pound (GBP_A0-FX): 15-Minute The British Pound formed a perfect Bearish Gartley on 15-minute chart in Figure 6.21. The perfect Bullish AB=CD pattern completion point and the 0.786 XA retracement in the 1.3830 area were the defining limits in the PRZ, as the price action reversed immediately after testing these numbers. The 1.618 BC projection complemented the resistance and confirmed the optimal entry target for the trade. Again, it is important to note that the distinguishing element of this example is the precise 0.618 B point retracement that validated the structure.
Figure 6.21 The price action in the Potential Reversal Zone (PRZ) shows an
ideal reversal after the AB=CD and the 0.786 XA retracement were
tested. The interesting aspect of this reversal is the downside
continuation that occurred after the reversal was complete.
However, the quick test that occurred at the pattern’s completion
could have resulted in a missed opportunity.
When Gartley Pattern Summary The Gartley pattern is a controversial pattern. Despite the varying interpretations within The Great Gartley Controversy, the most harmonic Gartley pattern possesses distinct characteristics at all points within the structural rules were originally outlined in “The Harmonic Trader.” The 0.618 B point retracement is critical in defining a valid
Gartley structure. Although the 1. Precise 0.618 B point retracement of the XA leg. 2. Precise 0.786 D point retracement of the XA leg in the PRZ. 3. 1.27 or 1.618 BC projection. 4. Equivalent AB=CD. 5. C point retracement can vary between a 0.382 to a 0.886. The Gartley pattern must include these specific conditions to define the best harmonic structures. Although the Gartley may resemble a Bat, the Fibonacci ratios utilized in the setup are unique to this pattern. In addition, the pattern should be quite distinct and possess ideal symmetry. |
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