The first thirty minutes today continued yesterday’s decline. When the market is trending strongly in either direction, many traders have conflicting emotions. There is the desire to enter the trend, to take part in the quick profits they see being made. And there is the fear of getting into a position just as the market reverses. Anticipating logical reversal points may help you make a profitable decision.
If the trend has been in effect for several days, you must go to longer term charts to find possible turning points. Sometimes it involves looking at previous pivots that become support or resistance. And sometimes it matches a Fibonacci external retracement or a Fibonacci extension. Today it was an extension.
The three most common Fibonacci extensions are measurements of 61.8%, 100%, and 161.8% times the previous move in the same direction. The large blue arrows on the chart show where the last two down moves came within one tick of an exact price match of 15.5 points — the 100% extension.
You use these Fibonacci levels just like support and resistance. If you’re lucky, you’ll get a DIVERGENCE there, but today that didn’t happen. What you don’t do is open or close a position just because a Fib level is reached. Today we bounced, and I didn’t try to turn the bounce into a short sale because of where it occurred. The 100% extension, or measured move, is often a powerful turning point.
If we had broken through, I would have looked to the next support, Fibonacci or otherwise. If it were far enough away for a reasonable profit, then I’d look for an entry trigger. Fibonacci measurements and support or resistance are just landmarks on the charting terrain. But if you combine these landmarks with entry or exit triggers, you’ll have some powerful tools to improve your trading.