How Fibonacci Contained Price Recently

Sep 30, 2007: 2:27 PM CST

Some traders love the esoteric ‘magic’ of the Fibonacci Retracement Lines, which are becoming more and more popular in trading circles.

Fibonacci Retracement Lines are available in most charting platforms, including the free site StockCharts.com.

The ‘hard and fast’ rule for constructing a retracement is to choose a meaningful price swing high and then draw the lines to the most meaningful price swing low, and the software calculates the 61%, 50%, and 32% retracement automatically for you.

One can expect at least some of these lines to provide temporary support and resistance for the price in question.

Let’s look at how the Fibonacci numbers relatively contained price in the Dow Jones Index over the last three months (implications in this case are almost identical to the S&P 500):

  • Price grid was drawn from July 17th Swing High to August 18th Swing Low
  • The Orange Line indicates when it is safe to read Fibonacci Retracements (you cannot make any sense of the projections prior to this line)
  • Price fell just short of the 61% retracement, then swung down just beneath the 38% retracement line
  • Price was then contained ‘perfectly’ at the 61% retracement and temporarily at the 50% before being contained at the lower 32%
  • Before price broke out due to the Federal Reserve Announcement, price was being halted at the 61% retracement
  • A likely play – provided the current Fib lines are still active – would be to short-sell to the 61% retracement, now at 13,454
  • Price would invalidate the current Fib Grid if it were to break above 14,000.

 

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