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A Trading Tutorial on the “Gartley 222” Reversal Pattern

It seems like it was a lifetime ago, but back in 1992 I visited Larry Pesavento and Jim Twentyman at their trading room in Pismo Beach, California. I had hand charted May soybean prices from the first day of trading on October 5, 1936 to the time I visited them and was sharing with them some of my findings. At that meeting Larry introduced me to the practical use of geometry in trading.

One of the patterns Larry shared with me was what he called a “Gartley 222” pattern. He called the pattern this because it was described on page 222 of the book Profits in the Stock Market written by H.M. Gartley back in 1935. This pattern is now used by many traders and was single handily popularized by Larry.

 

chart 1- gartley 222 buy

Characteristics of the “Gartley 222” Reversal Pattern

  1. The swing from Point A will terminate at Point D. This will be at the 0.618 or 0.786 retracement level of Swing XA 75% of the time. The other 25% of the time the retracements will be 0.362, 0.50, or 0.707. A 0.50 retracement is a strong pattern. There have been books and trading systems written about and designed around 0.50 divisions of swings in time and price.
  1. There “should” be an CD = AB pattern observed in the move from A to D. At times CD may equal 0.618, 0.707, or 0.786 of AB. At times CD may equal 1.272 of AB.

 

  1. The BC move will typically be 0.618 or 0.786 of AB. In strongly trending markets expect only a 0.382 or 0.50 retracement.
  1. Analyze the time frames from Point X to A and A to D. These time frames will also be in ratio and proportion. For example, assume that the number of time bars from Point X to A is equal to 17 bars and the time bars from A to D is equal to 11. Eleven is approximately 0.618 of seventeen.
  1. There will be a few instances where the CD = AB move will give a price objective at Point X. This will be a true double bottom or double top formation.
  1. If Point X is exceeded the trend will continue to move to at least 1.272 or 1.618 of the X to A move.

 

chart 2- cd=ab buy

An integral part of the Gartley 222 pattern is the relationship of CD = AB. As stated above, in strongly trending markets CD may equal 0.618, 0.707, or 0.786 of AB. While the CD = AB pattern is part of the Gartley 222 pattern it appears regularly in other patterns.

A Classic Gartley 222 Pattern

chart 3- gold gartley

From the spike high on May 12, 2006 (Point X) April gold declined to a low on October 4, 2006 (Point A). From the low of October 4, 2006 prices rallied to a high on February 27, 2007. This high was at an almost exact 0.618 retracement of the decline from Point X to Point A.

The rally from October 4, 2006 to February 27, 2007 was composed of three swings. The rally of Swing AB from October 4 to December 5, 2006 amounted to 86.00. The rally of Swing CD from January 5 to February 27, 2007 amounted to 85.30. This pattern was an almost ideal Gartley 222 pattern. The pattern indicated that gold was a sale at Point D.

(As an aside, over the years of trading gold I have found that it regularly relates to “Golden Section” ratio retracements and expansions. This helps make gold an ideal trading vehicle.)

 

A Gartley 222 Pattern in December Corn at the Seasonal Low of 2006

chart 4- corn gartley

From the Major Low of December 9, 2005 (Point X) December corn rallied to a high on May 18, 2006 (Point A). Note that this high was at $2.87 ¼, the Second Square of Twelve. From the high of May 18, 2006 prices declined to a low on August 18, 2006. This low was a few cents below the 0.50 retracement of the rally from Point X to Point A.

The decline from May 18 to August 18, 2006 was composed of three swings. The decline of Swing AB from May 18 to June 26, 2006 amounted to $0.39 ½. The decline of Swing CD from July 12 to August 18, 2006 amounted to $0.51. Swing CD is 1.272 times Swing AB. The pattern indicated that corn was a buy at     Point D.

 

A Short-Term Gartley 222 Trading Pattern in May Soybeans as of March 21, 2007.

chart 5- beans gartley short-term

From the high of February 22, 2007 (Point X) May beans declined to a low on March 5, 2007 (Point A). From this low of March 5, 2007 prices rallied to a high on August 18, 2006. This low was a few cents below the 0.50 retracement of the rally from Point X to Point A.

The decline from May 18 to August 18, 2006 was composed of three swings. The decline of Swing AB from May 18 to June 26, 2006 amounted to $0.39 ½. The decline of Swing CD from July 12 to August 18, 2006 amounted to $0.51. Swing CD is 1.272 times Swing AB. The pattern indicated that corn was a buy at     Point D.

Conclusion:

Larry Pesasvento’s Gartley 222 Pattern is a reliable tool that appears in all markets and on all time frames from monthly bars to 5 minute bars. This pattern can be used to buy bottoms and sell tops.

 

Thanks for reading! If you know someone who could benefit from this, feel free to let them know about it!

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