Over the past few decades, I’ve investigated and experimented with countless ways to analyze stock charts and pick promising trade candidates. Not every approach found a place in my toolbelt of commonly used techniques. Elliott Wave never made it. I never got the hang of Point and Figure charts.
Another odd ‘tool’ that never quite found a home with me is Fibonacci analysis. I’ve read all about it over the years. I’ve been told over and over about Nautilus Shells, its presence all through nature, and the ratio of my hand to my forearm. When applied to stock market analysis, Fibonacci ratios are used to reflect upon the human nature factor in stock movement.
The Golden Ratio, called Phi, is 1.618. If a stock moves from price level ‘A’ to ‘B’, pulls back a bit, and rebounds, proponents of this theory say a likely price target of the next leg up will be ‘A’ * 1.618.
When an advancing stock pauses and retreats slightly, the target pullback levels are .50 of the original move, .618 (One over Phi) of the original move, or .382 of the original move (1 – (1 / Phi)).
For the most part, I don’t think about Fibonacci ratios in chart analysis. I eventually focused on identifying the stocks likely being accumulated by institutions. It seemed a better use of my time, and more profitable.
But every now and then I look at a chart and I bring up the Fibonacci tool. It continues to amaze, or perhaps the word is amuse, me at how often a stock pullback ends and the rebound begins right at the .618, .50, or .382 levels.
A strong stock will often pull back to just the 38% level and then rebound. A more volatile, actively traded stock, like many tech stocks, may pull back to the 50% level, but can still be considered a strong stock.
A moderately strong, less volatile stock may pull back 50% before rebounding. If a stock pulls back 68% or more, then it is a sign of weakness, a stock that isn’t yet drawing the attention of the large buyers.
Looking at some charts this weekend, I got curious with the Fibonacci tool.
GLD, the Gold SPDR ETF, in late June to mid-July, moved up from 115 to 130. Over the following three weeks, GLD fell back to the 123.80 area before rebounding on another leg up. That was right around a 38% pullback. A rebound from that level was an indication of strength.
GLD has since set another short-term high and pulled back again. Note that it pulled back to the 38% level. If GLD extends Friday’s up-move, this 38% pullback will suggest GLD’s strength is building.
Let’s look at a few stocks. McDonalds has taken hits lately. Recently-reported same-store sales were below expectations. But notice the pullback has been to the 50% level, if the current rebound stands. This stock may quickly recover if the overall market shows strength.
Amazon made a nice 3-month move up. It then pulled back, and recently it broke the down-trend as it rebounded upwards. Where did it rebound from? The 50% pullback level.
Fibonacci levels applied to weekly charts can offer insight into long-term moves.
Apple (APPL), one of the best success stories of the past few years, climbed from 81 to over 700 in less than four years. Concerns over market saturation and competition caused AAPL to retreat over the past year. But with a new product cycle starting (new products will be announced tomorrow), the stock has been rising in anticipation. Note that a double bottom may have been formed, right at the 50% pullback level. AAPL could very well be starting another multi-year climb.
In today’s Seasonal Forecaster I cover a very high probability trade on one of the above stocks. This trade should return the full targeted profit even if the stock moves 15% against the direction of the trade, a good trade strategy for these uncertain times.
Of course, there’s much more you need to know and many more stocks you can capitalize upon each and every day. To find out more, type in www.markettamer.com/seasonal-forecaster
Copyright (C) 2013 Stock & Options Training LLC
Unless indicated otherwise, at the time of this writing, the author has no positions in any of the above-mentioned securities.
Gregg Harris is the Chief Technical Strategist at MarketTamer.com with extensive experience in the financial sector.
Gregg started out as an Engineer and brings a rigorous thinking to his financial research. Gregg’s passion for finance resulted in the creation of a real-time quote system and his work has been featured nationally in publications, such as the Investment Guide magazine.
As an avid researcher, Gregg concentrates on leveraging what institutional and big money players are doing to move the market and create seasonal trend patterns. Using custom research tools, Gregg identifies stocks that are optimal for stock and options traders to exploit these trends and find the tailwinds that can propel stocks to levels that are hidden to the average trader.
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