Just for an UPDATE – though currently Nifty (spot) is at around 5880, last week it breached 5915 and bearish butterfly pattern reported earlier has been negated beyond this level! Does this mean it will not reverse or go upwards only? Well, it is difficult to gauge its positional move now as internal events like RBI meeting and external events like Japanese elections, BOJ (Bank of Japan) meeting & Fiscal cliff can add to volatility in already thinly traded market conditions! But certainly Nifty looks stretched at the moment and I will discuss that in the next post! But at the moment, I am happy that this has happened from the point of view of learning. Now I can point out precisely where traders go wrong, as few weeks ago, I received few emails on how to nail PRZ (potential reversal zone), which I replied individually instead of a post!!
To begin with, harmonic patterns are reversal patterns. Once D or point 5 is established to confirm the pattern, it is ready for the reversal. In our present case, bearish butterfly evolved at D or point 5 i.e. 5841! The minimum requirement for D is D=0.786 * XA, D = 127.2 or 161.8 * BC & AB=CD! Most of the traders are confused that point D is PRZ. They believe the reversal will happen from here only and open their trade – sure shot recipe for disaster!! Though point D could be a reversal point, it’s always prudent to draw PRZ beforehand for potential reversals. PRZ is basically a confluence of important Fibonacci levels like internal/external Fibonacci levels, Fibonacci extension level corresponding to XA/BC & ABC legs. Also, point D is dynamic in nature and will keep on moving up & down within the PRZ. This is the precise reason why it moved up down till 5915 (last level of PRZ) beyond which it negated the bearish pattern.
Now had it been a negated bearish gartley/bat pattern, there could have been a possibility of an evolving bearish crab pattern which always have the maximum risk reward ratio (also occur rarely) amongst various harmonic patterns. Earlier, crab pattern in Tata Motors was a brilliant example of how profitable it can be! But according to rules, butterfly can’t become crab – only gartley/bat can!! Interesting – isn’t it? I will cover it in later posts!
Now it’s your turn…..
Feel free to share your experience and thoughts in the comments area.
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