
Here is a strategy that should lay to rest any doubt you may have about order in themarkets.
Reflection is a strategy that combines three concepts with our FibZones. Those con-cepts are Symmetry, Average Directional Index (ADX), and Directional Indicator(DD. Let’s quickly review each of these concepts. After our review, we will look at afew examples of Reflection in action.
Symmetry: When the current market swing is similar in relation to price and/or timewith the previous market swing. With this kind of similarity, or symmetry, there is ahigh likelihood for price to reverse direction. Let’s look at a couple of examples.
@llmon 14-Oct-2002. 95,190 36.000 34,400 34.710AMar02 28Mayo2a +
 
6 PTS
PRICE SYMMETRY
Po\v ‘ / Mi!
0.000
 
 
Above is a daily chart of Verizon Wireless (VZ). This illustrates the power of pricesymmetry. After VZ completed a 6 point rally on May 28, 2002, which matched theprevious rally that ended March 4, 2002, VZ sells off more than 7 points over a fewweeks with very little countertrend movement. 
 
The Reflection Reversal Method 69
 
TIME SYMMETRY
An!
TRADING DAYS
Chart created by Dynamic Trader (c} 1996-2001
 
Symmetry, in the markets, not only exists on the price axis, but also on the time axis.Symmetry that occurs on the time axis can be a precursor to powerful reversals aswell. The illustration above is a daily chart of the retailer Target (TGT). On January15, 2002, the market had just completed a six-day selloff from high to low. Coinci-dentally (or not), the previous countertrend decline was also six days. After the Jan-uary 15 low was put in, the stock climbed over 5 points in a few days. That’s over10% in one week’s time.
    
         
a70 Chapter 5
Next we have the Directional Indicator (DI). There is a Positive Directional Indica-tor (+DI), which measures the force of an uptrend and a Negative Directional Indi-cator (-DI), which measures the force of a downtrend.
The third and final ingredient to our Reflection strategy is the Average DirectionalIndex (ADX). This is an oscillator that moves between 0 and 100 and tells the chartreader how strong the current trend is, but NOT whether that trend is up or down.Readings below 20 indicate a weak trend and readings above 35 represent a strongtrend. Readings above 60 are rare.
Again, the ADX does not tell you the direction of the trend, it simply states howstrong a trend is, be it up or down. Most charting software packages combine the DIand ADX into one study. The DI and ADX originate from Welles Wilder’s book NewConcepts In Technical Trading Systems written in 1978.
On the chart of Verizon (VZ) below, I have added the DI study to the bottom of thechart. The dotted line represents a Negative Directional Indicator (DI) and the solidline represents the Positive Directional Indicator (+DI). When the -DI is above the+DI, the trend is down. When the +DI is above the -DI, the trend is up. For ourstudy purposes, we are looking at the Directional Indicator of the past 21 bars.
  
 
- ago2
6 ptsPRICE SYMMETRY
|pn yl |i 6 pts 6.000
   resent a short-term blow-off in the trend.
 
 
 
            
ee72 Chapter 5
STRATEGY #2: REFLECTION
The goal with this strategy is to find strong short- to intermediate-term trends usingthe ADX and DI that are in the process of pulling back into a FibZone. The kickerhere is that we are looking for the pullback to be symmetrical in time or price withthe previous countertrend swing. It is this symmetry that triggers powerful reversals.
   
 
                                        
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The Reflection Reversal Method 73
Note: In other chapters, I illustrate strategies using a diagram. Due to the combination of in-dicators that the Reflection Strategy uses, I will use an actual chart (shown on the previouspage) of real price action instead.
Rules For Buys (Shorts Are Reversed):
1.2.
10.
The eight-period ADX must cross above 50.
After #1 is complete, wait for a swing high point to form. This swing pointwill be labeled “C.”
At swing point “C,” the 21-period DI should show the +DI line above the~DI line. Between the ADX and +DI, this will give us a stock that is stronglytrending and is trending up based on the +DI oscillator reading.
After items 1 through 3 have been established, from point C, find the previ-ous significant countertrend decline. Measure the amount of time thatcountertrend lasted and the number of points it declined from high to low.The high point will be labeled A, and the low point of this countertrend rallywill be labeled B.
. Using retracements, extensions, projections, and expansions, calculate
Fibonacci price support levels based on the high point C.
One addition that we will add to our normal Fibonacci analysis is measuringthe size of Swing A:B from #4 and projecting that price rally from swing highpoint C. This will establish the price symmetry point and help us to focus ona specific Support FibZone to look for a trade against.
Once price hits our Support FibZone, look to buy on a trade above the previ-ous day’s high.
The initial stop will be just below the Support FibZone.
The first objective on this trade is between the 50 and .618 retracement ofhigh point C to low point D made into our Support FibZone. At this point,
trail the stop to breakeven, or as close to breakeven as you can get based onthe price action.
The final objective is the 1.272 extension of high point C to low point D madeinto the Support FibZone.
 
                      
 
 
 
   
       
 
 
 
1iMri4:30 t4liri0:3081,820, 0.000 93.950, 3.4500.00% 4.29%0 Bars 14 Bars¥ v L,5.000,(6) | (10)84,260 Ret 1.272164.009) 4.00083.3{7)i fe3.000i $B 55 BLN} 3 bars aa.ea9 mupola® (5)i 1.3 pts( eed Bet BBBHi }e2.000iPht!ffit les ,000/ { | (4)| .Lt] nont tT: 3 Bars 3 Bars.Ve 1.6196 1.36%a 80.500, -1.320 82,910, -1.140x : 1210) BO. : i4twi3:30Mari0m ik iw 13t 14F Marl?7m
 
ADK 8,50.
 
a “ay7
 The Reflection Reversal Method 75
Reflection Long Example
1.2.
10.
The eight-period ADX crosses above 50.A swing high point is formed just under $84. This point will be labeled pointCc.
At point C, confirm that the 21-period +DI is above the —DI line. In this case,it is, So we can continue with the setup.
Now go back to the previous countertrend decline. It is labeled A:B with Abeing the high point. This countertrend move was three bars (each bar was60 minutes) and a total of 1.3 points. We'll come back to this, but it is criticalto identify the amount of time and the size of the previous decline.
With the high point in place, it is time to calculate Fibonacci price levels andconstruct a Support FibZone. This zone comes in from 82.22 to 82.87.
Remember our measurement from #4? Let’s take that 1.3 point decline andproject it from the point C high. That Price level comes in at 82.78. This iscalled the Symmetry level, which happens to fall within our SupportFibZone.
Price hits our FibZone and begins to reverse. A long trade is entered on atrade above the previous bar’s high AFTER hitting the Support FibZone. Ourentry in this scenario was 83.39.
A stop is placed immediately below the Support FibZone.
Once price starts to reverse to the upside, we can label the low point into theSupport FibZone as point D. Now we can calculate the .50 and 618retracement of the move from C to D. This is typically where we take partialprofits and trail up our stop. However, this is a scenario that often occurs onlower time frames where there really isn’t a gain to lock in at this point, so Ido not take any profits there. I wait to take the entire position off at the 1.272.The only action item here would be to trail the stop to higher levels, ideallyto breakeven, or to the swing low point made into the Support FibZone.
The final objective, which is the 1.272 extension of swing C:D, is hit at 84.26for an approximately 1 point gain in three hours of trading. Note that an op-tional money management technique once the 1.272 level is hit would be totrail the stop to the previous bar's low. That way it allows you to potentiallyparticipate in a much larger move, if it develops. The downside is that youcould give up gains as well, but it does keep you in a winning trade.
 Chapter 5
 
 
 
 
 
 
 
 
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 Chapter 5
 
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46.279 Ret 6.536| D | 46.760 Ret 0.500 (5)
44,994 Reese
10,000
37.840 Ret 0.500
Te a 36.233 Ret 0.618(9) 35.000
30.000
27,325 Ret 1.272
(10)
 
 
LOLOL SOL ENO OO ONO:Chart created by Dynamic Trader (c) 1996-2001
 The Reflection Reversal Method 79
Now, referring to the chart on the previous page...
Rules For Shorts (Buys Are Reversed):1. The eight-period ADX must cross above 50,
2. After #1 is complete, wait for a swing point low to form. This swing pointwill be labeled “C.”
3. At swing point “C” the 21-period DI should show the -DI line above the +DIline. Between the ADX and DI this will give us a stock that is stronglytrending and is trending down based on the —DI oscillator reading.
4. After items 1 through 3 have been established, from point C, find the previ-ous significant countertrend rally. Measure the amount of time thatcountertrend lasted and the number of points it rallied from low to high. Thelow point will be labeled A, and the high point of this countertrend rally willbe labeled B.
5. Using retracements, extensions, projections, and expansions, calculateFibonacci price resistance levels based on low point C.
6. One addition that we will add to our normal Fibonacci analysis is measuringthe size of Swing A:B from #4 and Projecting that price rally from swing lowpoint C. This will establish the price symmetry point and help us to focus ona specific Resistance FibZone to look for a trade against.
7. Once price hits our Resistance FibZone, look to short on a trade below theprevious day’s low.
F 8. The initial stop will be just above the Resistance FibZone.
9. The first objective on this trade is between the 50 and .618 retracement oflow point C to high point D made into our Resistance FibZone. At this point,trail the stop to breakeven, or as close to breakeven as you can get, based onPrice action.
10. The final objective is the 1.272 extension of low point C to high point D madeinto the Resistance FibZone.
  
Chapter 5
sWed 26-Jun-2002 28,300 2!
 
 
aMar0239.560, 5.27015.37%wTD
+
23May0236.360, 6.22020,649618TD
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35-828 Ret 8508
37.544 Ret 0.78636.995 Ret 6.888
35,962 Ret 0.61838.505 BAL35.02 —__ (7)
33.250 Ret 0,500
(9)
32.516 Ret 0.618
26.448 Ret 1.272
 
ADX 8,50
 
 
D12t
Chart created by Dynamic Trader (c) 1996-2001
   
The Reflection Reversal Method 81
Reflection Short Example
1,2.3.
The eight-period ADX crosses above 50.
At point C, confirm that the 21-period -DI is above the +DI line. In this caseit is, SO we can continue with the setup.
Our entry in this Scenario was 35.02.
10. The final objective, which is the 1.272 extension of swing C:D, is hit at 28,44
 
for approximately a 6.5 point gain.
  :iP[Bei
 
 
82 Chapter 5
STRATEGY Q&A
Question: Is there a mechanical way to scan for symmetry?
Answer: To my knowledge, there is no software that can scan for price symmetry. Ido know that some software programs are working on perfecting the time symme-try scan. That’s one of the reasons I like these strategies. They are not easily put intoa box.
Question: Why do you take partial profits between the .50 and .618 retracement levels?
Answer: Trading this strategy, I found that stocks or commodities would reverse atthis level and many times stop me out for a loss. When I started taking profits andtrailing stops at this level, I not only added some “base hits” of profits to my bottomline, but I eliminated losses. Then occasionally I would hit a home run on the lasthalf of a trade that kept moving in my direction. Sure, there are cases where I getstopped out prematurely and price keeps moving in the direction I wanted. That’strading!
  
 
CHAPTER 6
TRADING PULLBACKSUSING THE TRIPLECROWN STRATEGY
  
 
STRATEGY #3: TRIPLE CROWN
After analyzing thousands upon thousands of Support and Resistance FibZones andanalyzing what the characteristics were of those FibZones that provided some of themost powerful trading opportunities, I have found a combination of Fibonacci pricelevels based on a specific set of swing high and low points that are combined to cre-ate what is one of my favorite strategies, the Triple Crown. A Triple Crown is com-prised of three Fibonacci price ratios which occur in this specific order:
50.786618
It is a specific combination of these three Fibonacci retracement levels that identifypotentially powerful reversal areas in any tradable market with liquidity.
There are three swing points that we need to be concerned with in this strategy fromwhich the ratios are derived. In the case of looking for long trades, we identify themost recent swing high point and the two most recent swing low points.
  
Swing Point: CPr(1)a (4)-50-786618(2). aly (3)Swing Point: BwwSwing Point: A
 Se,
Trading Pullbacks Using The Triple Crown Strategy 85
Rules For Buys (Shorts Are Reversed)
1.
2.
A stock has formed a swing high point with a bar on each side with a lowerhigh. Label this point C.
Identify the two previous low points that are below the current bar’s low. La-bel the low point closest to point C as point “B.” The swing low that is lowerthan B will be labeled “A.”
There are only three Fibonacci ratios we need in this Strategy. So, first calcu-late the 50 and .618 of low point A to high point C. At the same time, calcu-late the .786 retracement of low point B to high point C. To be a valid TripleCrown Zone (TCZ), the .786 retracement must fall between the 50 and .618.So, the order from the top of the zone to the bottom is 50, 785, .618.
If the order of the Fibonacci ratios are “valid,” then we have a TCZ, and nowWwe wait for price to come down and touch our TCZ. Once it does hit theTCZ, I look to buy above the previous bar’s high.
Initial stops are just below the TCZ. for long trades.
. Once the swing point is made into the TCZ, which is labeled point D (be-
cause A, B, and C are the swing points used to calculate the original TCZ),we can calculate the 1.272 extension of Swing C:D. This price level serves as atrigger to initiate the trailing stop game plan.
When this Fibonacci price level is hit (which, by the way, means the trade isworking for us), our Trailing Stop Plan takes effect:
* Place a stop on half of the position at the higher of the previous bar lowor the original entry price (breakeven).
* On the other half, place the stop at the original entry (breakeven).
. As a higher high is made, continue to trail the first half stop to the previous
bar’s low. Again, only if you make new highs do you move the stop to theprevious bar’s low.
. Once the first half of the position is stopped out...
* Start trailing the last half of the position at swing low points as pricemoves up. This allows for potential home run trades and gives room forsome volatility. There is more subjectivity and discretion to this stop,but the idea is to give the trade room to breathe, but not to be foolishand turn a winner into a loser.
  
 
 
 
 
 
81.575 Rel 1.272
 
78,650 Ret 0.500
78,249 Ret 8.89877.800 App 1.00¢ |"
 
 
 
 
 
Octi4m 15st Oct2im 22t 2awhart created by Oynamic Trade 996-200
Triple Crown Long Example:
1.2.3.
High point C is identified.Go back and label the previous two swing low points A and B.
After calculating the .50 and .618 retracement of A to C and the .786retracement of B to C, we have identified a TCZ. In fact, we also have a sym-metry level at 77.80 to strengthen our TCZ.
. Price hits the TCZ, and I’m looking to buy above the previous bar’s high. In
this case, a long trade is initiated just above 79.11.
. The initial stop on this trade will be just below 77.80.
  
 
Trading Pullbacks Using The Triple Crown Strategy 87
 
 
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7.800 App 1,000
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‘Oct2im ‘22t 2aw
 
Triple Crown Long Example:
6. Once low point D is established and price starts to reverse up out of the TCZ,it is time to calculate the 1.272 extension of the C high to the D low. Thatcomes in at 81.57.
7. Trail the stop on half of the position to the previous bar’s low at 80.48 afterthe 1.272 ratio price level is touched. The other half of the trade moves tobreakeven. We are now focused on actively managing half of the position.
8. As higher highs are made, continue trailing half of the position’s stop up tothe previous bar’s high. This goes on for quite a few bars, and half of thetrade is finally stopped out at 87.00. Over 7 points of locked-in gain. Nowlet’s turn our focus to the stop that is sitting down at breakeven around 79.11.
9. This final stop placement is a bit more subjective, as we want to trail it up toa previous swing low point, but still give the stock room to run. In this case, Ifirst trail the stop up to 84.91. Price then makes a higher swing low point at86.15 where I am ultimately stopped out of the final portion.
oo                            
 
Chapter 6
 
61.387 Ret 1.272
 
Sell offs areSymmetrical!
52.345 Ret 0.385
\ —<—$—$—$——— SSS 51.040 apn trot POD (3)
50.981 Ret 0.618
 
 
 
Triple Crown Long Example:1. High point C is identified.2. Go back and label the previous two swing low points A and B.
3. After calculating the 50 and .618 retracement of A to C and the .786retracement of B to C, we have identified a TCZ. The .786 is slightly abovethe .50, but when it is within pennies like this AND we have a symmetrylevel at 51.84, I will consider it a valid TCZ.
4. Price hits the TCZ, and I’m looking to buy above the previous bar’s high. Inthis case, a long trade is initiated just above 55.40.
. The initial stop on this trade will be just below 50.98. 
 
Trading Pullbacks Using The Triple Crown Strategy 89
 
 
x 540160.55,40059,360 $5,400
 
pf© | | IY oa
|
 
 
 
Triple Crown Long Example:
6. Once low point D is established and price starts to reverse up out of the TCZ,it is time to calculate the 1.272 extension of the C high to the D low. That co-mes in at 61.38.
7. Trail the stop on half of the position to the previous bar’s low at 58.90 afterthe 1.272 ratio price level is touched. The other half of the trade moves tobreakeven. We are now focused on actively managing half of the position.
8. As soon as the 1.272 is hit, price reverses and half the position is stopped outat 58.90 for a 3.5 point profit on half. Now let’s turn our focus to the stop thatis sitting down at breakeven around 55.40.
4 9. This final stop placement is a bit more subjective, as we want to trail it up to
’ a previous swing low point, but still give the stock room to run. In this case, Ifirst trail the stop up to 55.82 when the first half of the trade is stopped out.Price then makes a higher swing low point at 57.23, so I move it up. Then afinal higher swing low is made at 58.35, where I am ultimately stopped outof the final half of the position.
 Chapter 6
 
 
4-Feb on. :02._. 834,720. 836.790 834 290 (836, 750..10, 200.195,250 359.250 849.250
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(1 ) > ©) 845,25
 
 
 
 
844,798 Ret 1.27
A = 852.25B = 850.25C = 845.75 840.00D = 849.25
 
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Triple Crown Short Example:1. Low point C is identified.2. Go back and label the previous two swing high points A and B.
3. After calculating the .50 and .618 retracement of A to C and the .786retracement of B to C we have identified a TCZ.
. Price hits the TCZ, and I’m looking to short below the previous bar’s low. Inthis case, a short trade is initiated just below 847.75 on this five-minute chart.
. The initial stop on this trade will be just above 849.75.
  
Trading Pullbacks Using The Triple Crown Strategy 91
tect eb-03 Mon.15,05 834.750"857-250 859.250 "42.250(A)
 
 
 
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i = _—Hh I ~— SHB BBE REE || wl (7)
 
 
 
 
 
That comes in at 844.75,
7. Trail the stop on half of the position to the previous bar’s high. In this case,that would be the same as our entry point, so the whole Position’s stop ismoved down to breakeven. We are now focused on actively managing halfof the position as the E-mini S&P 500 futures make new lows.
8. Price continues down, and I’m able to trail half my stop as we make newlows down to 843, then to 842, then to 840, where I'm stopped out of half thePosition for a 7.75 point gain on a five-minute chart.
9. Now let’s shift to trailing the last half of the stop down. It looks like theswing point at 843 is a good swing to use. I trail down three more times from841.25 to 837.25, and finally to 835.75, where ’m stopped out of the last halffor a 12 point profit. That’s $600 per contract from a five-minute chart.
oo
    
            
50,9403 4 "300 0. 2004,90 42,400
 
 
47.863 Ret 0.618©) 47.255 Ret 0.78646,600 Ret 0.50046,060 App 1.000
       
 
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Triple Crown Short Example:
1.2.3.
Low point C is identified.Go back and label the previous two swing high points A and B.
After calculating the .50 and .618 retracement of A to C and the .786retracement of B to C, we have identified a TCZ with a symmetry price levelat 46.06 to strengthen our zone.
_ Price hits the TCZ, and I’m looking to short below the previous bar’s low. In
this case, a short trade is initiated just below 45.19 on this daily chart.
. The initial stop on this trade will be just above 47.86.
 Trading Pullbacks Using The Triple Crown Strategy 93
 
 
     
   
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Triple Crown Short Example:
