Using Fibonacci Retracement S&P 500

It would seem that the S&P500 breaking through the 1000 barrier only lasted 7 days. During this period we have seen significant indecision and a move of some key important indicators to the downside.

In the chart below you can see.

  • RSI in a negative divergence since the start of August.
  • Rate of Change (ROC) negative divergence since the start of August.
  • MACD in negative territory (below the Zero Line) and looking to stay there
  • Price moved strongly below the 10 & 20 Day Moving Averages
  • Also the move below 1000 on heavy volume (remember the lesson on volume)

It is at “potential” turning points like these that it can be prudent to try to assess how far the retracement of the current trend may go.

Here I have plotted a Fibonacci Retracement Indicator on the chart, starting at the beginning of the move (July 13 2009) to the high point of the move (August 28 2009)

TeleChart2007 chart courtesy of Worden Brothers, Inc.

Fibonacci numbers are revered in mathematics as the numbers that describe the natural world. The Sequence is simply the sum of any two numbers equals the next in the sequence
1,1,2,3,5,8,13,21,34,55,89 etc…..

The theory behind Fibonacci is that this mathematical pattern can be used to predict the waves of a trend. The most important numbers seem to be in percentage terms 38, 50, 62.

Therefore if a trend moves from $1 to 100$, it may retrace (go back down) to 1 of 3 important levels. $62, $50, $38.

If we are in a severe downtrend of course this retracement could be much deeper.

The line plotted on the Chart (yellow dotted line) from the beginning of the current trend (875 points) to the latest high point of the trend (1039 points), the possible retracements are

  • 38% retracement to approximately 975 points
  • 50% retracement to approximately 954 points. This would be supported by resistance from the 50 day MA
  • 62% retracement this would mean a complete breakthrough of the 50 day Moving average, and a potential challenge of the 200 day moving average.

At this point it may be wise to move to cash to let the market decide if it is going to move further down, and to what level it will find strong resistance. I moved to cash yesterday.

The market has come a long way in a short time since March and is well overdue a retracement / consolidation phase, before resuming its 2nd leg up in the new Bull Market.

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