Stocks & Commodities V.

19:1 (40-47): The Gartley Setup by Rudy Teseo

CLASSIC TECHNIQUES

Fibonacci Ratios Still Work To Measure Retracement Of Stock Movement

The Gartley Setup

A

If identifying head-and-shoulders or cup-with-handle patterns has left you frustrated, dont despair! This classic
system might be for you.

0.618

/ 0.78
6

0.6

18

by Rudy Teseo

rice patterns by themselves (without moving averages and indicators) are all that is necessary to chart
a stock and understand whats happening. We might say that pattern
recognition is the heart of technical analysis. If thats true, why
are technical indicators the backbone of 99% of our systems? Is it because we have trouble X
identifying those head and shoulders, cups with handles,
and ascending triangles? Heres a technique that uses
price charts only, is fairly easy to master, and has a track
record of 70% wins.
I use Fibonacci ratios to measure the retracements of a
stocks up and down movement, with the objective of developing a geometric pattern that, when completed, gives a buy
or a sell signal.
The sequence of the Fibonacci numbers is zero, 1, 1, 2, 3, 5,
8, 13, 21, 34, 55, 89, 144, 233, 377 to infinity. Starting with
zero and adding 1 begins the series. The calculation takes the
sum of the two numbers and adds it to the following number.
If you take the ratio of two successive numbers in the series
by dividing the former by the latter, you find the ratio settles
down to a constant value, which is 0.61804. This is called the
golden ratio or golden number. If we reverse the procedure
and divide the latter by the former, we get 1.61804. These
numbers are reciprocals. These two numbers plus their square
roots, which are 0.786 and 1.27, respectively, are the only
Fibonacci ratios I use.

CHART PATTERNS
Now for some pictures to save a lot of words. The Gartley
model was first identified and named by H.M. Gartley in his
1935 work Profits In The Stock Market. It shows a series of
price reversals and the retracement percentages that establish
an ideal pattern. This is the pattern I want to show you.
Figure 1 shows an uptrend XA with a price reversal at A.
Using Fibonacci ratios, the retracement AB should be 61.8%
of the price range A minus X, as shown along line XB.
At B, the price reverses again. Ideally, the retracement BC
should be between 61.8% and 78.6% of the AB price range,
not the length of the lines, and is shown along the line AC. At

8
0.61

0.786

1.27 /
1

.618
D

FIGURE 1: BULLISH GARTLEY MODEL.

Gartleys model from his 1935 book uses
a series of Fibonacci ratios to establish a
stock trading in a predictable pattern.

C, the price again reverses (harmonics at work!). In this

pattern, again using Fibonacci ratios, the retracement CD
should be between 127% and 161.8% of the range BC and is
shown along the line BD. Price D is the trigger to buy. The
target retracement DT is initially 61.8% of the range CD;
however, the price could go through the roof.
The overall retracement XD is a critical part of forecasting,
and is the retracement of the range AD with respect to XA.
XD should ideally be 78.6% of the range XA. One further
ideal is for CD to equal AB.
I have used ideal to stress the fact that there is no single
absolute value for any retracement, nor is there a specific
tolerance that tells you this developing pattern is a go or no-go.

REAL WORLD
Figure 2 takes us from the abstract and shows a bullish
Gartley setup in a chart of Applied Materials, Inc., with
retracements close to the ideal. Note that the angles of A, B,
and C are only similar to the model. These angles are a
function of the time over which the price changed. Your
concern is only with the retracement ratios.
Once you understand the basic Gartley pattern, forecasting
a probable price reversal is just a matter of measuring the
range preceding the reversal and applying the correct ratio for
the developing area of the pattern. This procedure is part
science, part art. Your ability to examine a chart and see the
trend is key in how successful you will be.
The following procedure is essentially mechanical using
only paper, pencil, and calculator. Ive included an Excel

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Stocks & Commodities V. 19:1 (40-47): The Gartley Setup by Rudy Teseo

A
0.756

AB=CD=37

X=55
A=115
B=78
C=106
D=68.8
B

91.79
Initial
target

132.8

0.618
D

0.77

X
FIGURE 2: BULLISH GARTLEY. Applied Materials advances and retreats in a classic Gartley pattern.

model (Figures 3 and 4) that I use to speed up my processing

and reduce errors. Cell references are noted where applicable. The procedure may seem lengthy, but it is actually
straightforward:
1

Start by inspecting Figure 2. The key point is A. Until

you have a reversal from the uptrend, there is no
pattern developing.

Inspect the uptrend preceding the reversal for a logical

point X. This will be a pivot point, a significant low
from a previous downtrend. There may be several low
points to choose from. In Figure 2, you can see low
points before and after the point X I chose; none of
those choices would have resulted in a 61.8%
retracement of AB, however. I try to identify the range
XA so I can project point B, but until point B is
actually established by a price reversal, I cannot know
for sure I have chosen the correct point X.

Record your tentative X in cell A6 in the spreadsheet

and A in cell A11. The spreadsheet (Figure 3) computes B for you ($77.92) in cell E8 or, manually, take
61.8% of the range you have chosen as a likely XA and
subtract this value from A to arrive at the probable
value for B. Track the price action, expecting the price
to continue down to B and then reverse again.

When B does reverse at 78, enter this value in cell A16.

Measure the range AB and determine the ratio of
retracement. Although there are no set tolerances, if
the ratio falls between 57% and 67%, continue with the
pattern. If it is outside this range, see if there is a better
choice for X. For example, if the retracement was too
high, try a lower price for X. If the retracement was too
low, try a higher price for X. The retracement may go
as low as 78.6% of XA and still be a valid Gartley. A
pullback beyond this ratio, however, is most likely a
failure and should be discontinued.

As it turned out, the range XA measured 60 (115-55).

The range AB measured 37 (115-78). The retracement
is AB/AX or 37/60 = 0.616 pretty close to 0.618!

Take 61.8% and 78.6% of AB. Add these values to B

to arrive at the probable range of values for C. (The
spreadsheets values are in cells E13 and F13.) Track
the price action, expecting the price to continue up to
C and reverse again.

When C does reverse, enter the value of C in the

spreadsheet in cell A23 and check G18G20 for targets. Manually, measure the range BC and determine
the ratio of retracement. It should fall between 61.8%
and 78.6% of AB. In AMAT, the range BC measures 28

Copyright (c) Technical Analysis Inc.

Stocks & Commodities V. 19:1 (40-47): The Gartley Setup by Rudy Teseo

(106-78). The retracement ratio

BC/AB or 28/37 = 0.756. This is
within the range 0.618 to 0.786,
so the Gartley pattern is still a
viable hypothesis.

FIGURE 3: GARTLEY IN EXCEL. Enter turning points in the blue boxes. Read price targets in the pink ones.

Manually, take 127% and 161.8%

of BC. Subtract these two values
from C to arrive at the probable
range of values for D (cells G18
and H18). Track the price action
expecting the price to reverse
within this range. To further narrow this range, perform two more
procedures.

Manually, measure AB, which is

37 in AMAT. Subtract AB from C
or 106 37 = 69. The result should
fall within the range measured in
step 7. In AMATs case, it does
(see cell G19). This fulfills the
guide that AB should approximate CD.

10 Now, take 78.6% of AX and subtract it from A. The result should

also fall within the range in step 7.
In AMAT, it was $67.84 (cell G20).
11 You should now have three values fairly close together (67.84,
69, and 70.44), any of which may
be the reversal signal at D. Be
ready to move on this signal. Your
entry point will be a subjective
decision. Choose the lowest price
so as not to enter prematurely.
12 The price reverses again at 68.8,
point D. Enter this value in cell
A28.

FIGURE 4: FORMULAS. Here are the formulas for the computations shown in Figure 3.

The Gartley system is not widely known

and has not had much press. Initially, it
may seem too complicated to be worth
the effort, but these patterns are
extremely reliable in predicting the buy
price and target price.
Copyright (c) Technical Analysis Inc.

13 The range AD measures 46.2 (11568.8). The retracement AD/AX or

46.2/60 = 0.77. This is slightly
less than the ideal 0.786. Thus,
AMAT forms a Gartley with only
fractional discrepancies from the
ideal.
14 Finally, take 61.8% of CD and
add it to the actual D, 68.8. This is
your initial target price. A trailing
stop may be a good exit strategy

Stocks & Commodities V. 19:1 (40-47): The Gartley Setup by Rudy Teseo

X
69
58
D
B

122

81
A

FIGURE 5: AAPL. A bearish Gartley presages AAPLs demise in late 2000.

A
50

A-B=13
C-D=11
C

B
167
55

D
73

FIGURE 6: DELL. A bullish Gartley presages Dells taking off.

Copyright (c) Technical Analysis Inc.

T=56

Stocks & Commodities V. 19:1 (40-47): The Gartley Setup by Rudy Teseo

here. In AMAT, the range CD measures 37.2 (10668.8). The retracement CD/BC or 37.2/28 = 1.328.
This is within the range 127 to 161.8 (the projected
ratios for D), so a Gartley projection is justified. A
minimum upside for point T in AMAT is $91.79, as
shown in cell E25.
Just reading through the procedure sounds complicated;
however, when you do it several times, with Figure 2 to guide
you, you will find it is much easier done than said. Plus, all
you have to do in the spreadsheet is enter X, A, B, and C as
you identify them. All the targets and ratios are done for you.
Think this is too elaborate to come up often? Its not. See
Figures 5 and 6 for other examples.

SUMMARY
The Gartley system is not widely known and has not had
much press. Initially, it may seem too complicated to be
worth the effort, but these patterns are extremely reliable in
predicting the buy price and target price. One method I use to
simplify the calculations is to drop the pennies in the stock
price using the 50-cent rule. I also round off 61.8% to 62%,
78.6% to 79%, and 161.8% to 162%. The difference in the
results is minuscule.
The bullish Gartley is only one of many patterns using
Fibonacci ratios. For example, flip the bullish Gartley model
upside down in your mind and see a bearish Gartley with the
same retracement ratios. Go to the Websites listed in the
references section at the end and download the patterns you
will find there.
Rudy Teseo is a retired communications and computer consultant. He has also taught courses in investing, technical
analysis, and options trading.

REFERENCES
Gartley, H.M. [1981]. Profits In The Stock Market, Traders
Press (reprint from 1935 original).
http://www.harmonictrader.com
http://www.tradingtutor.com
See Traders Glossary for definition

Copyright (c) Technical Analysis Inc.