Trading What I See

Single Fibonacci levels often mark turns in the market, but it’s always more reassuring to have multiple reasons to consider a trade. If several Fib measurements line up at nearly the same price it’s called a Fibonacci Cluster.

Today started with a gap below yesterday’s range, with an immediate pullback to yesterday’s low where it met resistance. This was also a 38% Fibonacci retracement of the move from the previous close. Notice that the volume decreased on the pullback. An entry could either be a short-term trendline break, or the break of the faster moving average.

Then there was a quick drop into a Fibonacci cluster. When you are trading clusters you don’t know whether price is ignoring them until the farthest level is broken. This means that if you enter at the highest level, your stop should really be placed under the final Fib point. This is why I want a Fibonacci cluster to have the levels very close together.

In this case there were three Fibonacci measurements. I’ve placed the three arrows showing where they fall. The highest level was a Measured Move, where “C” was equal to “A.” Next came the 262% external retracement of the A-B move, and the actual turn was at a 38% retracement of the rally from the March 14th bottom. The three levels were within 1 1/2 points of each other.

But in this case the Fib range wasn’t an issue — there was no reversal green bar until after the bottom Fib. That was my preferred entry. The Stochastic divergence gave some additional support to the trade.

The move up made another A-B-C Measured Move, and again the Stochastic diverged from price. The yellow “C” is actually another Fibonacci cluster. I’ve left off two of the measurements to make the chart easier to read. It is an exact 78% pullback of the original drop, and there is a smaller Measured Move inside the “B” leg. The up-down-up action of “B” is another perfect a-b-c.

The market must have been making up for the lack of signals yesterday, because it finished with a third A-B-C, and once again there was more than one measurement to show the turn. It was a 62% retracement of the mid-day rally, and the A-B-C stopped at 162%. The only minor flaw in the pattern was that Stochastics waited for a second bottom before giving the divergence.