Fibonacci 127
Yesterday I closed the commentary without having any conviction about today’s market direction, but pointed out that continuing moves usually have a large first retracement (50% or more) followed by a smaller second retracement (normally 38%.) Since we closed with a second pullback of 38% there was certainly the possibility of additional rally.
Evidently the market overheard me, but after moving up again it refused to stop at my expected 162% level. Instead it gave a reversal signal using the Fibonacci 127% external retracement. External retracements are created when a move is retraced by more than 100%, and I feel that one of the most tradable reversals comes at 127%.
Think of this setup as being similar to a Spring. The previous top (the resistance) is slightly exceeded, and then price reverses. I like them even better when they are accompanied by a Stochastic divergence.
That’s what happened at this morning’s top, followed by a drop to the support of yesterday’s high. It was also a 50% retracement of the morning’s move. As soon as that pivot was created it was time to draw the lower yellow trendline and it’s parallel. That pivot also creates the rising blue trendline. The pullback stopped at the 78% Fibonacci level just as the yellow parallel was reached.
The next move down would have been difficult to trade because the moving averages are quite flat. There is also that rising blue trendline giving support. But shortly after it was broken the moving averages turned down.
I like to trade pullbacks to a trending moving average, and that occurred at what I have marked as the magenta “B.” The entry would have been just as price broke beyond magenta “A.”
The bottom around 11:00 (Pacific) had two markers — an A-B-C that ended at a Fibonacci 162% and another 127% Fibonacci external retracement of the morning rise. And at the second bottom there was also a small Stochastic divergence.
Drawing another trendline and its parallel gives you the “B” reversal, followed by a third 127% external retracement that matches the last A-B-C at 62%. Lots of multiple signals for entries and exits today, with three good examples of the importance of the Fib 127%.
