Trading What I See

Often the market will exceed a pivot just enough to trigger resting stops. That’s why the 127% Fibonacci retracement level is so important. We began the day with a drop to that level and then reversed to the upside.

There was enough back and forth movement during the first hour that it was hard to find an entry unless you use crossing the moving averages as a trigger. But notice how the A-B-C patterns are continuing from yesterday. That 127% level matched a “C” of 1.618 to form a cluster. When I see this I switch to a shorter oscillator and look for a divergence, and there was a nice one right at point “C.” (I use a 5/3/2 Stochastic for really short term work.)

The nicest rally of the day started at this bottom, and the rally reversed at a logical level — a 50% retracement from Wednesday’s high combined with a 1.618 external retracement of that A-B-C pattern that started the day. External retracements, once again, are just retracements that are larger than the original move. After 100% (double top or bottom) comes 127% followed by 162%. Any of those levels should be watched for a reversal or at least a place to take partial profits.

The pullback through the lunch hour again took the form of another A-B-C pattern, in this case with “C” equal to “A” for a Measured Move. Since that matched a 50% pullback of the morning rally, you had two reasons to go long. Looking at the bottom pane, the Stochastic gave a nice divergence for trade confirmation.

The afternoon rally was a bit smaller than the one this morning, but internally it again gave a nice A-B-C measurement with the “C” leg matching “A.” And once again there was a divergence at point “C.” If you review all the potential A-B-C trades yesterday and today, you’ll understand why I call this one of my favorite uses of Fibonacci.