Trading What I See

Sometimes Fibonacci measurements are obvious, and other times you have to make some tough decisions during the trading day. This morning was an example of how I attempt to make my choices.

The move up before lunch is marked with both magenta and blue A-B-C patterns. The magenta pattern started with yesterday’s 11:00 pivot low, and the blue pattern started at the magenta letter “B.” Looking back it’s easy to see that the blue A-B-C was the one to trade, but could you tell that in real time?

Remember that Fibonacci lines are just places where turns may occur — not where something has to happen. However if you have several Fib levels that match, a reaction becomes more likely. I had both patterns marked on my chart.

As soon as we exceeded yesterday’s high (green line), I drew the 127% external retracement of yesterday’s pullback (shown in white.) There is an almost perfect match between the blue A-B-C and that retracement, creating a Fibonacci cluster. As we reached that level, the Stochastic made a divergence with price, indicating a probable top and a good exit point.

The move down over the lunch hour also made an A-B-C pattern (not marked), but this one didn’t quite reach its target. The reason — it stopped precisely at the 38% retracement of the entire move. As is often the case, when you get close to a support or resistance level (or a Fib level), you must switch to price action for your final decisions.

The afternoon was another A-B-C pattern that once again ended at a 100% Measured Move. Notice that it was a flatter pattern than we had earlier. That often means that it’s time for either a pause or a correction. With tomorrow being Fed day, that’s not surprising.

Someone asked me last week for a good book on Fibonacci relationships. I probably have 10 or 15 that cover the subject in some manner, but the one that has influenced me most in the way I treat the A-B-C pattern was Forecasting Financial Markets by Tony Plummer. I just noticed that he has now expanded his book with new material in an updated version. If you are interested, see below.

Tony Plummer’s Forecasting Financial Markets