Which works better, support and resistance or Fibonacci? As you’ll see from today’s chart, sometimes they work together, but you really need to pay attention to both. I think the reason more people watch support and resistance is that it takes less effort. The information is already on the chart.
We started the morning with a gap failure, and although I could see it happening, what I didn’t see was an entry that satisfied my risk/reward requirements. I finally found an entry after the two green bars between points #2 and #3. My standard sequence is enter the position, adjust my protective stop, and then start looking for my exit.
There are no normal Fibonacci retracement or extension levels close to the reversal, and yet my rules got me out on the green bar just after point #3. Support or resistance tells me to trail a close stop, just like I do at an important Fibonacci level.
At point #4 S&R and Fibs join forces to warn of trouble as we hit a resistance level along with a 50% retracement of the earlier drop. Notice that although the S&R levels called the turns to the tick, I didn’t say anything about entering a trade there. There is a big difference between a possible turn zone and a trading signal, and they don’t necessarily occur at the same time.
Just after point #4 is one of my trading signals. The market has already had trouble moving above a resistance zone, and now the Stochastic is showing a nice DIVERGENCE as it exceeds the previous peak by two ticks. I wonder how many people entered at that 50% retracement or at the resistance level and then placed very close protective stops.
If you entered the trade somewhere after point #4 — there were several pullbacks you could have used — the question is where to anticipate an exit, since there is no support level in sight. Whenever we exceed a previous pivot high or low, I automatically draw in the 127% and 162% external retracements. Measure from point #1 to point #2, multiply that number by 1.27, and subtract the result from point #2. Prepare to exit around point #5.
Will the market stop there? I don’t know. It’s my job to have a line there “just in case.” And to have some general rules about what to do next. Is it a lot of work? Let me quote myself from yesterday.
I spend most of the day drawing and erasing trendlines and Fibonacci measurements …
Is it worth it? Take another look at that chart!
