The setups I include on this blog are used in conjunction with the 3/10macd and the criteria I ascribe to it as a way to alert me to an existing condition of price. The key concept to take away from this blog is that I try to anticipate what will happen on the higher time frame by using a faster time frame to trigger the trade setup. I do not trade a "system" I use two indicators to clue me in to price conditions. Please read the Disclaimer located in the sidebar of this site. I can be contacted via email at
I am always open to questions, comments, or suggestions on how to improve this blog.

Sunday, November 8, 2009

Deep Retracement

Snap a Fibonacci Price Retracement line between obvious swing highs and lows. The typical levels watched as potential Support/Resistance are the 50%, 61.8%, and 38.2%. While the typical "external" projections include the 150%, 161.8%, and 138%. But another, less used, level is the 78.6% retracement. This often overlooked level is important to watch during deep retracements. We see this deep correction over and over again, and how many have actually traded on the wrong side of the market because price nearly gave up all of it's previous move?
Take a look at some of these charts and the 78.6% retracement they all have in common. We don't have to go back far to see them in action; here's Friday on the 5-minute chart:While it looked like selling was going to send prices back under the lows of the day support was found, a higher low was established, and price never came back to this support zone. Used in conjunction with a momentum oscillator we could have been suspecting a reversal at this level.
What's even more interesting is what we've seen in the SPY since the swing low of July. After the initial upward momentum impulse, all of the major corrections we've seen found support at (or around) this 78.6% level.After our initial impulse in July we can snap a Fibonacci Retracement calculator from that low to the first obvious high before price corrected. Doing that we can then get projections (known as "external" projections) for where we might expect overhead resistance to occur. Sure enough, price has experienced congestion at these projections and has, so far, extended all the way to the 150% projection (The way Tradestation draws these lines and the numbers you see depend upon where you snap your lines. I choose to draw them from low to high for upward projections. In that case I end up with external projections labeled -50%, -61.8% and so forth. If I were to draw them from high to low I would get 150%, 161.8%, etc. Irregardless, what we're dealing with is a Fibonacci sequence of numbers that extend beyond the prescribed swing low and high).
So, going forward we have a Fibonacci resistance level overhead. While Fibonacci levels may seem arbitrary we can see for ourselves that this 138.2% (-38.2% in this case) coincides with prior levels of congestion and has acted as a pivot between support/resistance levels. A break of this level will be significant and cause us to suspect a move at least back to the highs. Watch this level to see if resistance holds.

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