Fibonacci Bounces
On Federal Reserve days we sometimes wait until 2:15 Eastern time before there is any movement, but today there wasn’t really much doubt about the outcome. Using yesterday’s closing pattern as a measure, the market decided to show off how well it understands Fibonacci ratios.
We opened with a small drop, bounced a bit, and then proceeded to fall from support level to support level. Remember, my definition of support levels includes both previous pivots, Fibonacci retracements, and Fibonacci extensions. Today it was mostly extensions.
The two white arrows show yesterday’s last two moves. The first arrow is for the original measurement, the length of the drop just before the close. For a Fibonacci extension, you multiply this distance by 0.618, 1.00, 1.618, and 2.618 and subtract it from the pivot near the end of the second arrow. You could almost hear the market go thump, thump, thump as it fell down the stairs.
So how do you play this kind of move? For the first hour (down to the first Fib at 798) I was just waiting to see if everyone else was going to wait all morning. This is where I depend on my moving averages. Notice how they keep getting farther and farther apart? That tells me we have some sort of trend developing. Then I watch as we pull back towards the moving averages, looking for an entry.
The entries, of course, depend on your trading style. If I can’t get an oscillator pattern I like (usually on a faster oscillator than I show on the site), then I’ll use a trendline break (yellow) or the break of a regression channel for my entry. On today’s chart each of the yellow trendlines is drawn from at least two tiny pivots.
Others wanting a bit more confirmation might wait for the actual Fib level to be broken, trading a little less profit for a bit more assurance that the trend was still in force.
By the time we hit the 262% level, I had no intention of a re-entry. Except in a very strong trend, we usually don’t go beyond that level, and there was the combination of lunchtime and the Fed announcement coming up.
As for the few minutes before and after the announcement, I never trade. I play a private game of guessing which way, and how far, the craziness will carry before we change directions. No points or profit in that, but no losses either.
