FIBONACCI (Part I)
The Primary Numbers 0.618, 0.786, 1.27, 1.618
The primary Fibonacci numbers are the essential means to accurately
gauge price action and to identify potential trade opportunities. These
numbers are used to determine patterns as harmonic. The primary numbers
consist of: 0.618, 0.786, 1.27, 1.618. These four numbers should become
the basis for identifying any potential trade opportunity. A chart must be
considered harmonic, when price action is observed to reverse off these
numbers in a specific fashion. If price action “bounces” off these numbers,
you should assume that more harmonic action would likely continue.
The most important function of these numbers is that they are an
effective means of quantifying price action. By establishing certain areas to
study, it is possible to determine or “gauge” the state of price action and
define significant trading opportunities. Although price action often
exceeds the exact price level where the harmonic calculation completes, it is
very common for reversals to occur shortly thereafter. Therefore, it is
critical to examine the price action in the entire zone before determining the
validity of a trade. In many cases, the set-up may require several price bars
of consolidation before changing trend direction. In other instances, the
reversal may require only 2 or 3 price bars to completely test the pattern
completion point and validate the new trend. Despite these varied situations,
the focus should still remain on the price zone where the pattern completes.
0.618 Retracement
The 0.618 is an effective Fibonacci ratio that reveals a great deal
about the overall trend of a stock. The 0.618 retracement is the first area to
examine for potential support when price action is declining, and it is the
first area to examine for potential resistance when it is rallying. Channels
that develop with 0.618 retracements offer high probability trade set-ups that
have a low risk. Also, most technicians are aware of the 0.618 - or as they
like to tell the public, a two-thirds retracement. So, when a 0.618 reversal
has occurred, it is my opinion that a greater amount of technical traders
participating in that stock are aware of this price action. Hence, the 0.618
reversal point becomes an even more significant price point.
0.786 Retracement
0.786 is a very significant Fibonacci retracement.
When a stock is declining, it is a critical area for support before retesting the
initial bottom. When a stock is rallying and attempting to retest a recent
high, the retracement can act as significant resistance. The key to gauging
the 0.786 as a potential reversal point is to study the price action at the 0.786
ratio and assess the following move. The price action around the 0.786 can
provide substantial information regarding the potential future of a stock.
Although the 0.786 is relatively unknown in the investment industry, it is an
extremely effective gauge of a stock’s price action.
