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Fibonacci Retracements as Support/Resistance

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I wrote in my last Trader's Corner article (Wed, 7/19) on 'Signs of a Bottom in the Indexes'. Online access to this article happens if you click here)

I get more sure on seeing a reversal point coming when certain key and select technical and psychological indicators line up suggesting its coming soon. 'Confirming' a reversal then has t9o be a bullish pattern on the charts. For example, a rally from the area of a prior significant bottom or 'line' of support; i.e., multiple lows in the same area.

Often, especially if in near the absolute lows what looks to be a trade-significant bottom, I trade out of Index calls at the first failure at expected resistance. I'm not a very good 'trend' trader or the best at staying put (no pun) in a trend.

Staying with a trend implies trading for bigger objectives. For example, staying in a call position as long as a first reaction off a first significant high doesn't retrace too much of the prior advance. "To much" is a relative term and I use it as meaning not more than having a 62-66 percent retracement; or, in select other circumstances to NO MORE THAN a 100 per cent retracement of the prior move.

FIB RETRACEMENTS OF THE FIRST RECENT RALLY: S&P
Given that the S&P 500 (SPX) hourly chart and the strong index, it could be anticipated that it would retrace not more than a half to two/thirds of the first rally, which it did at 62%. Strongest would be if SPX only retraced 38%, then only 50% and finally not more than 62 to 66% (2/3rds) of prior advance. Retracements of not more than 66%, keeps the pattern bullish.

FIB RETRACEMENTS OF THE FIRST RALLY: NASDAQ

There is a circumstance with a weak index, market or market sector, whereby retracing ALL (100%) of its prior move, but not more and followed by a sharp surge higher, remains a still-bullish pattern called a double bottom.

The Nasdaq Composite (COMP) shows below in its hourly chart, how the retracement involved in COMP was 100% but not more. A place to add to call positions perhaps, as you know where to stop out or exit the trade; i.e., a price just below the 100% retracement.

I got the question from someone as to showing what I think is relevant ahead in terms of the FIBONACCI retracements on the DAILY charts, looking at how this present rally is climbing back in percent terms relative to the biggest last decline. What levels represent the fibonacci 38, 50, 62 (to 66%); even a 100% round-trip 'retracement'.

Am happy to oblige on that one and show the charts:

S&P 500 (SPX)
Where we got to today in the S&P 500 Index, at intraday highs for the past two sessions in fact, is to the 50 percent retracement point or to the 1273 area. This level of retracement will frequently be a 'stopper' in a rally for an index or stock that is in a STILL declining trend.

A move ABOVE the 50% retracement level at 1273 however suggests that SPX has above 'average' strength/staying power and could well take out the prior high around 1280, but encounter tough resistance around 1290 and a put play.

S&P 100 (OEX)

With the S&P 100 (OEX) as shown below, an extension of this recent advance to the 589-590 area implies resistance not only by the 66% retracement but by the fact that this was also a prior (countertrend) rally peak back in early-June.

A resistance area suggested not only by a key percent retracement of a prior move, by also accompanied by that same area being a prior high makes the area additionally important. For example, a strong move through 590 in the case of the OEX would set up the potential for a 100% retracement back to the prior early-May major top at 604.

NASDAQ

The Nasdaq Composite (COMP), as an Index of all (capitalization weighted) stocks trading on Nasdaq exchange, has been under a lot of pressure in past weeks.

The fact that COMP retraced completely its first rebound but then rallied again, suggested possible establishment of either the low end of a trading range or the start of a significant retracement of its prior decline.

Here's the rub with a weak index or stock: they often only manage a 'minimal' retracement of about 38% of the prior move, which would be reached if COMP get back up the 2150 area. A stock or index STILL in an intermediate downtrend will not usually retrace more than 50% or one-half of its prior decline (before falling again). IF the trend remains down still, COMP gets back to the 2200 area or the 50% mark and not further, perhaps then falling sharply from there.

As seen in the COMP daily chart above, the down trendline off the early tops since the April peak, may end up intersecting with the area representing the 38 to 50 percent retracements. For example, it within the next few days, COMP rebounded back to the 2200 area, this is also then resistance implied by the down trendline above.

NASDAQ 100

Per the Nasdaq 100 (NDX) chart shown below, the Index has to rebound back to the 1565 area to reach a 'minimal' 38% fibonacci retracement if seen in terms of the April to mid-July decline.

1600 is resistance doubly implied by the intersection of the NDX down trendline and the 50% retracement level; both suggest 'strong' resistance when the index or stock in question remains within an intermediate downtrend.

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