Reading Fibs
My apologies to those on the east coast, but the blog entries for the next few days will probably be posted quite late.
I’ve mentioned a number of times how the 162% external retracement determines the way I look at the short term trend. When the market rallies or declines I usually mark a potential reversal zone between the 127% and 162% retracements of the last rally or decline.
If we can get beyond 162% I assume the trend has actually changed. Today was an example of this situation. Yesterday’s low held for the first hour, and then we temporarily broke down. At first glance this might look like a Spring, but for that particular setup I expect the reversal to happen almost immediately. Today we broke below the low and traded there for an hour and a half.
But notice that we also broke a two day downtrend line (blue.) As will often happen, price pulled back to that line. I want first pullbacks after a potantial trend change to exceed 50%, and this one did, so any reversal trigger could be bought. After we resumed the uptrend, the 162% Fib level comes into play.
When price reached the 162% external retracement of that first pullback it looked like another reversal had set up. At this point I might exit at least part of any position I was holding, but without a divergence or some additional evidence of a turn I would probably not sell everything. Remember that the market will usually make some sort of hesitation at any important Fib level even if it is going to continue.
In yellow I have arrows marking the 78% pullback and it’s external retracement. After the hesitation, price finally exceeded the 162% level. Whether I’m in a trade or not, my bias is now up.
After we finally reach the top at 11:15 (Pacific) the market makes a small A-B-C pullback. It turns out to be a Measured Move, and also retraces 38% of the last large rally. I see this as a fairly strong buy area because we have exceeded the 162% level. Drawing the upper yellow trendline allows me to have three reasons for a buy — an A-B-C, a 38% Fib pullback, and hitting the yellow parallel trendline.
Of course if you entered at the 78% pullback you might still have a partial position through the end of the day.
We’ve ended the day at another 162% external retracement (blue arrows.) It’s a logical place for a pullback, but until we break out of that Daily rectangle I really consider the larger trend sideways, which means taking setups in either direction.
