Trend traders utilize pullbacks to enter a trend, and waiting for the price to pull back 61.8% (approximately) is a popular tactic. 61.8% is a Fibonacci retracement level, and most trading platforms provide a Fibonacci Retracement tool that draws these levels on your chart. A pullback of approximately 60% is very common in financial markets and is therefore used to provide possible trade signals.
Tesla Motors Inc. (TSLA) is in a downtrend since topping out at $286.65 in July. The most recent wave lower occurred in late December through early February, where the price fell from $243.63 to $141.05. That's a $102.60 decline, and 60% of that is approximately $61. When the price rises $61 off the $141.05 low, then the price has retraced more than 60%, and the price could start heading lower again. Tesla closed at $202.6 on March 8, right in that 61.8% retracement region.
There is no assurance the price will stop rising near the 61.8% retracement level, therefore, watch for the price to give some indication the pullback is over, and the downtrend is resuming. Since March 4 the price has formed a three-day range between $197.4 and $209.70. If the price drops below $197.4, it provides some confirmation that the 61.8% retracement area is providing resistance, and the downtrend may be continuing. A stop loss is placed above nearest high that occurred before entry (the exact level is not yet known, until the trade signal occurs); currently, that's just above $209.70. Place a target at $145, just above the $141.05 low.
Navient Corp. (NAVI) is also in a long-term downtrend, but has recently pulled back, erasing approximately 60% of the December and January decline. Like Tesla, the price has paused near the 61.8% Fibonacci level. The exact 61.8% level doesn't matter, rather, seeing the price stall in the vicinity of the 61.8% retracement level is reason enough to start monitoring for trades. Since March 4, the price has ranged between $11.65 and $10.94. A drop below $10.94 gives some confirmation that the Fibonacci area has acted as resistance, and the downtrend may be continuing. A stop loss can then be placed above $11.65. Place a target at $8.50, just above the $8.20 February low.
A bullish note on Navient is that it's trading at a low Price/Earnings ratio of 4.25, and offers a dividend yield of 5.77%. Assuming earnings hold steady, at some point, bargain hunters are going to start buying this stock. That's why a stop loss is used on the trade above—to keep risk small in case the price keeps rallying.
The same concept applies to uptrends. When a stock is trending higher, look to buy pullbacks when the price retraces approximately 60% of the last move higher. Wait for the pullback to pause near the 61.8% retracement level, and then buy when it starts to rally again. Since the S&P 500 is in a downtrend, there aren't many stocks currently showing this type of buying setup.
The Bottom Line
Fibonacci levels aren't magic, and there are no assurances the price will reverse at these levels. Yet, by combining multiple factors, Fibonacci levels can help spot trading opportunities. In both these examples the trend is down, so short trades are favored (trade in the direction of trend). The price has also paused near the Fibonacci level. The final step is waiting for the price to start dropping again before taking a trade. Both trades provide an approximate 4:1 reward-to-risk ratio. That means you don't need to right on every trade. By taking trending trades where a reasonable profit target greatly outweighs your risk, you only need to be right a few times out of every ten trades to make money.