Fibonacci Retracements

The only thing I know about Fibonacci is that he was this Italian guy who discovered the sequence of numbers that mysteriously appears all throughout nature. It was aptly called the Fibonacci sequence.  And its relevance is mind-blowing. This video doesn’t even cover half of it. But it gives a pretty clear picture.

It was no surprise when I learned that Fibonacci was also used in technical analysis. After all, they did say it appears everywhere. I saw it in my charting software but I didn’t know how to use it. I was a newbie who was trying to make sense of all the lines, clouds and colors. But it was when I was researching about the Fibonacci retracements that I stumbled upon Zee’s blog. Very interesting, I thought after reading the entry about Fibonacci (Trading 101: Fibo). Interesting enough that I spent the entire afternoon, and a little after dinner time, browsing through his entire website. And the rest, as they say, was history.  

Two weeks ago, we started discussing about Fibonacci retracements and how to use them. It was one of the lessons I was looking forward to. I knew little about it. I was intrigued because I knew it was some of the mentors’ most favorite weapons.

To put it simply, Fibonacci shows the possible support and resistance areas.

HOW TO PLOT FIBONACCI:

On uptrending stocks,

1. Look for the lowest point before the recent run-up (100%)
2. Look for the most recent high (0%)
3. Identify in which level consolidation happens

The higher the Fibo level the stock consolidates, the better. It means that there is great pressure from the bulls to buy the price at a higher price than to let it dive into the abyss. 

Take these charts for example:

DD

Found support at 23.6% level, consolidates in that area

MPI

Found support at 23.6% level, consolidates in that area

JGS

Found support at 38.2% level, consolidates on and above that area

I see it as someone driving his new car to the countryside. At 200 kilometers, a new distance high for the car, he sees the gas indicator light up. He looks around and realizes he’s in the middle of nowhere. There weren’t any gas stations in sight, he doesn’t know how long the stretch of field goes and then he sees this:

He remembers he passed by one gas station not 10 minutes ago. He decides to retrace his route, and have his tank filled before he goes any further. And maybe even grab a bite. With his tank and belly full, he’s ready to continue the momentum and pick up where he left. And then maybe, just maybe, reach another distance high.

But what if the last gas station he passed by was an hour ago? He has no choice but to go back because he's running out of fuel. But if he goes back that far, would he still have the energy to continue his trip? Nakakatamad na mehn. Ganon din sa stocks. Napapagod din 'yan, parang puso. 

A few things to remember:

• The ideal retracement levels would be at 0-50%. Anything below that is more bear than bull.
• Consolidation at a certain level could take weeks to months. 
• When a stock consolidates on a level with a bullish bias (0-50%), there is still no guarantee that it will soar to the skies. It could, but it also could lose momentum just as much. This is the reason why it’s always better to buy on breakout.

But of course, if there is anything certain about the market it’s this: nothing is. So if the charts don’t go according to your bias, you know the drill. Do it without mercy.