After inching back towards all-time highs… stocks remain mixed this week, despite yesterday’s Fed rate cut.
It may take a few days to fully absorb the Fed comments…
However, there are opportunities in the market right now… that we can take advantage of.
In fact, it’s a good time to talk about beaten up value stocks for a potential retracement…
How do you know when a stock is done going down? And if it’s set for a bounce… how much can we expect it to rise?
You’ll be amazed at how much intel can be captured after scanning through basic chart patterns and moving averages.
But I’m going to do you one better today.
And show you how to master Fibonacci retracements… A tool that will help you anticipate how far a stock price will bounce…
What are Fibonacci Retracement Levels?
A Fibonacci retracement level is a tool used in technical analysis that refers to specific areas of support or resistance… Each level is associated with a percentage…
The percentage is how much of a prior move the stock price will have retraced at that level. The Fibonacci levels are 23.6%, 38.2%, 61.8% and 78.6%…. and while not officially a Fibonacci ratio, 50% is also used.
Fibonacci retracements can be used in many ways… These levels are inflection points where some type of price action is expected, either a rejection or a break…
So they can be useful for trade entries, stop loss levels, price targets, etc.
The indicator tool is simple to use… I simply draw a line between any two significant price points, such as a high and a low of a trend…
Then the tool will create the Fibonacci percentage levels (support and resistance) between those two points.
So for trade entry… if I am watching a stock previously in an uptrend, but it’s now making a pullback… I will simply use the tool to add the retracement levels on my chart…
And then if I see a bounce at the 61.8% level, followed by one of my setups… I now have extra confidence in my trade…
Another way to use the Fibonacci levels is to find profit targets…
In the chart of Under Armour, Inc. (UAA) you can see a downtrend form after the gap down…
Once UAA began to form a bottom pattern… I start watching for signs of a buy signal to profit on a bottom bounce…
For this chart, I like to use one of my favorite patterns call the Rounded Bottom Breakout (RBB) to take advantage of a bounce on stocks like this…
Once the buy setup occurs in UAA below, the Fibonacci levels can help plan my price targets and stops…
These levels are easy to watch and can be helpful by giving me an important level to adjust my calculated price target around.
As you can see…. the retracement on UAA stalled at the 61.8% level (the golden ratio)… a very significant Fibonacci level…
By knowing the importance of these levels, I am able to capture my profits and keep myself from holding a “bounce” too long…
The beauty of the Fibonacci levels is that, unlike many other indicators, they are fixed… so no recalculating or moving your objective during the trade…
In the same chart… instead of finding a bottom and using the 61.8% level as a target…
You could have waited for the stock to retrace to the 61.8% level and watched for a trade setup to the downside… to get you in a move back to lows and possible continuation of the downtrend…
Whichever way you look to trade… Fibonacci levels are best used when they’re complemented with other indicators.
Moreover, in the example used above, I combined the Fibonacci levels with my proprietary trading strategy… specifically my rounded bottom breakout (RBB) setup…
If you want to see how I use these trades, join me in my live training room…
Source: PetraPicks.com | Original Link