NEWS AND ANALYSIS

Incisive market commentary and expert opinion

Stay ahead with our market commentary and webinars from our in house market strategist

Open a Live AccountOpen a Demo Account
 
+ Show blog menu

Categories

Menu

Collapse 2017 <span class='blogcount'>(206)</span>2017 (206)
Expand June <span class='blogcount'>(27)</span>June (27)
Expand May <span class='blogcount'>(35)</span>May (35)
Expand April <span class='blogcount'>(31)</span>April (31)
Collapse March <span class='blogcount'>(38)</span>March (38)
Bounce in oil helps to steady equities - AM Briefing
30 Mar 2017
US stock indices consolidate - Video Update
29 Mar 2017
Risk appetite returns - AM Briefing
29 Mar 2017
S&P500 - Topping out, or consolidating? PM Bulletin
28 Mar 2017
Risk appetite returns after the Trump wobble - AM Briefing
28 Mar 2017
Beware hidden relationships between seemingly unrelated markets - Trading Guides
27 Mar 2017
Risk assets slump in wake of Trump’s healthcare debacle - AM Briefing
27 Mar 2017
Congress vote puts markets on hold - AM Briefing
24 Mar 2017
Markets on hold ahead of crucial vote - Video Update
23 Mar 2017
Tranquil markets await big data - AM Briefing
23 Mar 2017
Investors rattled after equity sell-off - Video Update
22 Mar 2017
US Markets Snap 109-Day Streak - AM Briefing
22 Mar 2017
Crude oil update - PM Bulletin
21 Mar 2017
European markets stable on the open - AM Briefing
21 Mar 2017
Dollar slips after G20 communique - AM Briefing
20 Mar 2017
FOMC post-mortem - Video Update
16 Mar 2017
Rate hike sends stocks higher - AM Briefing
16 Mar 2017
FOMC rate decision and Dutch election in focus - Video Update
15 Mar 2017
Oil rally gives markets lift - AM Briefing
15 Mar 2017
Crude trades at lowest levels since production cut agreement - PM Bulletin
14 Mar 2017
Politicians take centre stage again - AM Briefing
14 Mar 2017
Trading Psychology: Risk Management - Trading Guides
13 Mar 2017
Article 50 deadline approaches - AM Briefing
13 Mar 2017
European stocks push higher after Draghi’s hawkish stance - AM Bulletin
10 Mar 2017
Non-Farm Payroll look-ahead - PM Bulletin
09 Mar 2017
Fed rate hike seems certain - AM Briefing
09 Mar 2017
Market expects Fed to hike rates next week - Video Update
08 Mar 2017
Another twist in the French election - AM Briefing
08 Mar 2017
Odds slashed on Fed rate hike - PM Bulletin
07 Mar 2017
Investors lacking direction this morning - AM Briefing
07 Mar 2017
Fibonacci Retracement - extensions - Trading Guides
06 Mar 2017
Equities slip in early Monday trade - AM Briefing
06 Mar 2017
Modest profit-taking sees US indices post rare loss - AM Briefing
03 Mar 2017
Crude struggles to break above resistance - Video Update
02 Mar 2017
UK baffled by the origins of their favourite brands - PM Bulletin
02 Mar 2017
Fresh record highs for major indices - AM Briefing
02 Mar 2017
All eyes turn to the Fed - Video Update
01 Mar 2017
Markets react positively to Trump speech - AM Briefing
01 Mar 2017
Expand February <span class='blogcount'>(36)</span>February (36)
Expand January <span class='blogcount'>(39)</span>January (39)
Expand 2016 <span class='blogcount'>(483)</span>2016 (483)
 
 
 

 

This is a follow-up to the “Fibonacci Retracement - an introduction” blog under Trading Guides. On the face of it, a simple Fibonacci Retracement would appear to be redundant in terms of identifying significant areas of support and resistance once prices have retraced 100% of their initial move. Here we have a chart of the S&P500:

https://www.spreadco.com/assets/06.03pm1.png

What we can see here is that after the sell-off which gave us the key high-low of the Fibonacci Retracement, the S&P rallied sharply. What we can also see is that the rally was strong and fairly relentless. The only significant pause came after the S&P had retraced more than 76% of the initial move. This was one of those occasions when the Fib drawing tool was of very little help when it came to identifying significant trading levels. Pull-backs were shallow making it difficult to establish new long positions, while shorting the index would have proved very expensive indeed. There were a few possible trading opportunities around the 0.76 area, but these were high risk and would have required some deftness to execute profitably.

But that needn’t mean that there’s nothing else to be learnt from the initial sell-off that was the basis for drawing on the Fib in the first place. Sure, one could start again by marking out a new Fib retracement, but this wouldn’t be ideal. Firstly, although you could still work with the established low point, you now have to pick a high at a time when the index hasn’t finished its current upside move and so could end up making new highs, and that’s like trying to nail down jelly. Secondly, the whole idea of the Fib retracement is to help identify where prices may encounter significant areas of support or resistance in the future. It helps to have a decent amount of historical data to help with this. Fortunately, we don’t have to start all over again as the Fibonacci Retracement also has extensions beyond the full 100% move which can be very helpful in identifying significant price levels. Here’s the S&P again using the same initial high-low points for the Fib but also including extensions:

https://www.spreadco.com/assets/06.03pm2.png

As we can see the 1.24 extension held as resistance for a significant period. In addition, there was a particularly violent move when the S&P briefly broke above 2,188 then failed to hold here on a closing basis only to fall below and then bounce off the 1.0 Fib line at 2,116. That represented a 72 point, or 3%, move in under three days. What this goes to show is that the Fib can still have validity even after the market has retraced 100% of the original move. In fact, the price action beyond the original move can often throw up stronger trading signals.

By extending the chart out further we can see that the S&P500 soon resumed its rally. But interestingly price activity around the Fibonacci Extensions indicated a couple of occasions when a modest pull-back would have indicated some potential buying opportunities. These are marked with circles and arrows.

https://www.spreadco.com/assets/06.03pm3.png

Of course it’s fair to say that in these examples I’m back-tracking and fitting in price activity to the drawing tool. Despite this it is still interesting to see how often this market has found support, or run into resistance, at specific Fibonacci levels. I’ve highlighted some others below:

https://www.spreadco.com/assets/06.03pm4.png

It’s important to note that Fibonacci retracements and extensions may work very well for a particular market for a length of time but then stop being effective. Likewise, it’s quite common to draw on Fib retracements and find no fit whatsoever. Then again, some Fib levels may work well for certain markets but not others. The rule is not to force compliance. In other words, don’t try and visualise significant trading levels where none exist. Also, remember that Fibonacci levels are just a guide. It could be that certain markets conform better to Gann levels than Fibonacci ones for instance. So make sure you don’t put all your faith in just one or two drawing tools or technical indicators. In addition there’s no such thing as a sure bet, so always use strict risk and money management.

Disclaimer:

Spread Co is an execution only service provider. The material on this page is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by Spread Co Ltd or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

 

Posted by David Morrison

Tagged: Trading Guides

Category: Trading Guides


Add a comment Add comment            

 

 
© 2017 Spread Co Limited. All Rights Reserved.

Spread Co Limited is a limited liability company registered in England and Wales with its registered office at 22 Bruton Street, London W1J 6QE. Company No. 05614477. Spread Co Limited is authorised and regulated by the Financial Conduct Authority. Register No. 446677.

Spread betting and CFD trading are leveraged products and can result in losses that exceed your deposits. Ensure you understand the risks.

Losses can exceed deposits. Click here to learn more.