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 Fibonacci 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 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 Fibonacci extensions: