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In 1935, H.M. Gartley identified a corrective pattern in his book, “Profits in The Stock Market”. The pattern is a “zig zag”, or complex corrective move within a trend.
Basic Gartley:
 Click on image to enlarge!
While his book defined some specifics on what factors make the pattern more likely to hold, it also served as a starting point for later Fibonacci based analysts to refine the support and resistance factors involved. I’ve studied the pattern for several years, taking notes on which Fibonacci ratios provide the most reliable support and resistance scenarios.
Back to the daily chart for the June gold contract, GC. There was a decline from a minor target starting on March 3rd and lasting until the 12th. Once this started to rally off the low, we’d want to see what sort of resistance is in the way of a new swing to upside, and where the targets would be if that resistance doesn’t hold. Note that price stopped just short of the .786 resistance retracement at 1136 in the chart below. Once price started to fail at that level, in fact anywhere from .618 to .786 resistance, the goal is to see where the downside targets would land if the prior swing low is exceeded:
 Click on image to enlarge!
By plotting the target extensions of the March 12th low to the March 17th high, we can see that the 1.272 target came in at 1088, and the 1.618 target landed at 1076. I also added a 100% price projecting taken by measuring the drop from March 3rd to March 12th, projected from the interim high on March 17th. A good Gartley support patterns will show that projection landing near one of the target extensions. And one other factor:
 Click on image to enlarge!
The best Gartleys will also have a major retracement level from a larger swing at or near the support levels created by the pattern itself. In this case, the .618 retracement support at 1084 lands right near the top of our Gartley pattern. This was plotted by running a retracement tool from the February 5th low to the March 12th high. There were also Fibonacci Timing factors for a possible pivot low at this support area, and those will be discussed in a later article.
One of the most important reasons to plot this information? A trader working strictly on price action might take a short when the swing low on March 12th was violated, thinking that the pattern is shifting to lower lows and lower highs. That’s fine, but plotting the Gartley and additional support shows us that this is likely to be a short term trade with clearly defined downside targets, as opposed to something that might run longer term.
Let’s look at the resistance that was in place when price started to move off that low:
 Click on image to enlarge!
1122.50 is the 100% price projection of the intervening low to high swing, projected from the new low, March 12th to March 17th projected from March 24th. Once this level was violated it invalidates the possibility that a downside pattern is in play. Additional resistance to consider; the .786 retracement at 1133.60. That’s usually not an important factor in a Gartley support scenario, but it’s additional reassurance that a daily Gartley pattern will play out to targets once we see a close above it.
Our momentum indicator combination also triggered a long side entry, when all the CCI readings showed as above zero on the chart and price crossed above the 34 period exponential moving average. Further confirmation that this was a trade to hold; the 50 CCI crossing above +100, showing that there was sufficient momentum to clear any additional resistance.
One of the best aspects of trading the Gartley pattern is that the targets are derived by plotting the target extensions of the entire “zig zag”. The extension targets are where we need to be prepared for price to hold, so the more room until these are hit, the better. Current target on this swing lands at 1163.
One last chart showing how the target was derived, and the entry triggers on March 31st:
 Click on image to enlarge!
Intraday traders had several opportunities to take advantage of this pattern earlier on, and those looking for a swing trade, but with the time to monitor for intraday entries had the best of both worlds. Earlier entries developed into the daily long side trigger too. We monitor Gold on several timeframes from intraday up to weekly for this kind of scenario.
Check out my site for more information on the Gartley pattern, including 2 videos showing how to plot it and trade it, and printable “cheat sheets” showing the ratios involved!
For more from Mark including his “Chart of the Day”, visit MJBraun.net. |
