Trading What I See

The most common market retracements are 38%, 50%, and 62%, but some markets and certain conditions seem to toss in a few others on occasion. One of these is the 0.786 retracement and we ran across a few of these today after making a precise 50% pullback of yesterday’s final drop.

I received an e-mail from fellow Fib-watcher Jim Henninger over the weekend pointing out that congestion patterns in the Russell 2000 often contain this .786 retracement. He sent me another e-mail today as the market was making his point. His information is well worth quoting.

When we enter chop/triangulation I start watching .786 retracements like a hawk. I do this especially when the 34ema flattens. The .786’s often define the upper and lower ends of the immediate trading range and define where triangle breakouts will fail (if they’re going to fail).

Jim ties these congestion measurements in with the NYSE Tick readings. Unless a move pushes the ticks up to around 1000, he anticipates a reversal as the .786 level is reached.

When I failed to find the same precise turns from bottoms in today’s action, I remembered another measurement from Cynthia Kase’s book Trading With The Odds. Again a quote. After pointing out the most common retracements that I mentioned in the first paragraph she says

Retracements of 21 and 89 percent also occur too often to be ignored, indicating that the initial force was either very strong or very weak. The larger the force, the smaller the retracement.

And look what I found when I pulled out my Fibonacci ruler again. Today’s tops kept repeating the 78% number while the bottoms seemed to prefer 89%.

But how many lines or levels can you watch? It depends on your timeframe and how many markets you track. Remember that all the techniques I follow on Trading What I See will work on daily or weekly timeframes too. It’s just my preference to work from a single market and a 3 minute chart.