MoneyShow's Tom Aspray often uses Fibonacci analysis to
determine likely entry points and profit targets for his Charts in Play
recommendations. Here, he uses a few recent examples to examine more closely how
he establishes these preferred buy levels.
In determining whether a market is likely to go up or down, I first look at
the monthly, weekly, and daily charts. This step often is enough for me to
determine which ones need more careful analysis.
In the second phase, on-balance-volume and relative performance analysis play
a primary role, though other technical tools are often also used.
Once I find a market that I think has a high probability of going up or down,
then further work must be done in order to determine an entry level, potential
stop, and price objective.
I come across a number of markets each week that I think show a good
potential to rise or fall 10% to 15%, but they are dismissed as they do not
present any reasonable risk strategy at current levels. Often, I will determine
that risking 5% to make 10% to 12% is not worth it.
When I am looking to buy or sell a market that is correcting against a major
trend, Fibonacci retracement analysis plays an important role in helping me
determine a possible entry point, as well as a profit objective.
In this article, I would like to review some current as well as past markets
to show you the process that I use to identify a market to trade, and how
Fibonacci analysis is included to determine not only entry but also exit
Since the start of the summer, I have been watching the gold market, as I was
aware of the seasonal tendency for it to bottom in the latter part of July.
Since the highs in September of 2011, I have been looking for a correction
within the major trend that would last long enough to reverse the extreme
bullish sentiment that prevailed last summer.
Click to Enlarge
The major support level for the SPDR Gold Trust ( href="http://stocks.moneyshow.com/intershow.moneyshow/quote?Symbol=GLD">GLD)
that I identified soon after the top was the 38.2% Fibonacci retracement support
level at $140, which was calculated from the October 2008 low of $66 and the
September 2011 high of $185.85.
For those who are not familiar with Fibonacci analysis, a violation of this
level would have indicated a further decline to the major 50% support at $135.
(To learn more, read href="http://www.moneyshow.com/trading/article/31/TEbiwkly08-24112/Fibonacci-Analysis:-Master-the-Basics/">Fibonacci
Analysis: Master The Basics.)
Next: Confidence in the monthly OBV
The fact that the monthly href="http://www.moneyshow.com/trading/article/31/TEbiwkly08-23770/OBV:-Perfect-Indicator-for-All-Markets/">on-balance
volume (OBV) had confirmed the highs in September 2011 made me confident
that a major top was not in place. As of the end of August 2012, the monthly OBV
had moved back above its WMA which is a positive sign.
GLD made a low of $148.27 on December 29 (missing my buy level of $148.20),
then rallied 17% over the next two months. The sharp reversal on March 1 and the
poor volume on the rally suggested that the corrective period for gold prices
was not over.
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In May, the sentiment had become more negative, which href="http://www.moneyshow.com/trading/article/25/Charts09-27872/Has-Gold-Formed-a-Bottom/">suggested
the worst of the correction was over.
On June 8, after GLD had rallied to a short-term high of $159.20, href="http://www.moneyshow.com/trading/article/25/Charts09-28149/Are-Gold-Bulls-Throwing-in-the-Towel-/">I
recommended going 50% long at $152.42 and 50% long $150.28, with a stop at
$147.28 (meaning a risk of approx. 2.6%). This first buy level represented a
point between the short-term 50% and 61.8% support level, while the second level
was just above the psychological support at $150.
I wanted to give the position enough room under the December low of $148.27
so as to not get stopped on a quick downdraft. I was concerned that a decisive
break of the December lows could lead to a test of the major 38.2% support
In the past week, GLD has overcome the downtrend on the
daily chart and completed the triangle or href="http://www.moneyshow.com/trading/article/25/Charts09-24382/Profit-from-Flag-Formations/">flag
formation (lines a and b). The ability of GLD to overcome the 38.2%
Fibonacci retracement resistance sets the next upside target at $167, which is
the 50% retracement level.
The key 61.8% level is at $171.50, which is not far below the significant
chart resistance from November 2011 and February 2012 in the $174 to $175.46
area. The daily OBV has broken through the resistance (line d) that goes back to
last November. The weekly OBV (not shown) also indicates that an important low
is in place.
A daily close above the 50% and of course the 61.8% retracement resistance
would further support a move to new highs. The 127.2% Fibonacci retracement
target on the monthly GLD chart (see figure 1) is at $196, and that is where I
would be looking to take some partial profits.
GLD is a tough buy here, as the first minor support is in the $157 to $158.50
area (line c) with further levels at $154.80. Therefore, the risk of buying now
is a bit too high for my liking. If the rally stalls near current levels, a
setback into this support zone over the near term should set up a new buying
opportunity. Sentiment has quickly turned more bullish, so this is a
In my opinion, it is more likely that GLD will test stronger resistance
before the first rally phase is completed. The next daily sell signals should be
followed by a correction back to the 38.2% to 50% support level, where
additional buying can be done.
Next: Using the longer term OBV and RS
I have found that using the longer-term OBV and href="http://www.moneyshow.com/trading/article/31/TEbiwkly08-23452/Spot-Leaders-and-Losers-with-RS-Analysis/">RS
analysis can be one of the best ways to determine whether a correction is a
buying opportunity or not. Specifically, I look for the monthly OBV and RS
analysis to confirm a major new high, and then develop a strategy to buy on the
Click to Enlarge
Amazon.com ( href="http://stocks.moneyshow.com/intershow.moneyshow/quote?Symbol=AMZN">AMZN)
is a good case in point. Its correction from the 2007 high of $101.09 had a
classic a-b-c pattern, and at the end of January 2009 (line 1), the monthly RS
line moved back above its WMA. The relative performance confirmed the 2007
The monthly OBV formed higher highs in 2007 and 2008 (line c), and had a
strong uptrend (line d) from the 2007 lows. The OBV was already back above its
WMA as the overall market was bottoming (line 1).
The rally from the lows at $34.68 lasted until April 2010, as AMZN reached a
high of $151.09. This was just above the 161.8% target from the 2007 to 2008
correction, which was at $142.62. The 127.2% Fibonacci retracement target at
$119.49 was hit 11 months after the lows.
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AMZN dropped to a low of $106.01 in June
2010, which was just below the 38.2% Fibonacci retracement support from the 2008
low of $106.62. The weekly chart of AMZN shows that this decline also tested
trend line support (line b) and prices were also close to the weekly href="http://www.moneyshow.com/trading/article/31/TEbiwkly08-25975/Buy-Sell-or-Wait:-A-Way-to-Decide/">Starc-
There were several bullish factors heading into these lows that favored
having resting buy orders in the market. The monthly OBV and RS had been
confirming the price action and had long-term bullish patterns. The weekly
analysis also suggested AMZN was correcting, not topping, and the RS line had
formed a continuation pattern (line c and d).
The weekly OBV was holding well above its flat WMA in June and was forming
higher lows (line f), unlike prices. Typically, I look to buy at just above the
38.2% support, and then try to do additional buying below this support.
For the stop, using one under the 2007 high of $101.09 as well as the
psychological support level of $100 was a reasonable approach. Under the 50%
support at $92.89 was too wide. Round-number stops are a bad idea, but a stop of
$99.28 should have been wide enough to protect against any transitory breaks of
the $100 level.
As for the buy level, 0.5% above the 38.2% support at $106.62 would have
worked out to be $107.15. As for a second buy area, the mid-point from the high
of $101.09 and the 38.2% support at $106.62 would be $103.85. This would work
out to an overall risk of 5.9%.
With the upside target, I prefer scaling out of long positions, as it helps
reduce the overall risk to the portfolio and can be positive psychologically.
Selling just below the prior high of $151.09 would have been a valid approach.
My main target would have been the 127.2% Fibonacci retracement target from
the $151.09 high to the $105.66 low, which was at $163.45. Therefore, attempting
to sell at 1% to 0.5% below this level, say at $161.80 to $162.60, would have
been the plan.
As it turned out, AMZN eventually exceeded the 161.8% Fibonacci retracement
target at $179.17, eventually reaching a high of $191.60 in January 2011. (For
my current Fibonacci analysis of AMZN, see href="http://www.moneyshow.com/trading/article/25/Charts09-29033/Upside-Targets-for-Apple-and-Amazon/">last
Next: Let's look at Macy's
For the final example, let's look at Macy's ( href="http://stocks.moneyshow.com/intershow.moneyshow/quote?Symbol=M">M), href="http://www.moneyshow.com/trading/article/25/Charts09-28522/Is-it-Too-Early-for-Retail/">which
I recommended on July 11. The stock had peaked in early May at $42.17, and
the new highs were confirmed by the monthly as well as the weekly RS and OBV
Looking at the rally from the August 2011 lows, the 38.2% support was at
$34.66, and had already been decisively broken in June. The 50% support was at
$32.35, with the 61.8% support at $30.04.
Click to Enlarge
Despite the corrections in June, the RS line had held well above its
long-term uptrend (line b) and the OBV also held above support. The daily chart
shows that the low at $32.31 came on July 12. The daily relative performance did
not confirm the lows, as it formed a short-term positive divergence.
The daily OBV bottomed in June (line e) and also formed a bullish divergence
at the lows. The major upside targets were the prior high of $42.17 and then the
127.2% Fibonacci retracement target at $44.67.
A week after longs were established, Macy's had surpassed the previous swing
high, confirming a bottom. By early August, the weekly OBV had moved back above
The 50% retracement resistance from the April high was surpassed in early
August, and just a few days later the 61.8% resistance was also being
challenged. With earnings out in just a few days, I then decided to recommend
selling half the position. The earnings were strong and Macy's rallied further
on the report.
Though the market is now much higher, I felt comfortable taking a quick 14.6%
profit, as the overall market was not looking that strong and an earnings
downdraft can never be ruled out. If the technical readings for the overall
market had been stronger I would have been more likely to hold on to the entire
I hope this lesson will give some of my regular readers a bit more insight
into how I come up with my recommendations. In my daily column, I often do not
go into as much detail, and thought it might be helpful.
I have found over many years that Fibonacci levels give my analysis an
additional degree of discipline and have often kept me out of trouble. In the
past few years, I have also learned quite a bit from href="http://www.personsplanet.com/" target=_blank>John Person about his
unique method of pivot-point analysis. When his pivot points and the Fibonacci
analysis identify the same price levels, one has an even higher degree of
Even if you are trading or investing based on the daily charts, take the time
to look at the weekly and monthly analysis, as I think it will help you in the