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DEFINITION of 'Fibonacci Arc'

Fibonacci arcs are half circles that extend downward from the top of a base line drawn between two points. These arcs intersect the base line at the 23.6%, 38.2%, 50.0%, and 61.8% Fibonacci levels and represent areas of potential support and resistance.

BREAKING DOWN 'Fibonacci Arc'

Fibonacci arcs are created by drawing a trend line, known as the base line, between two points that represent a trend. For example, a trader may choose the high and low point on a given chart or reaction highs and lows within a larger trend. These arcs represent areas of potential support or resistance that traders and investors might watch.

Fibonacci arcs are just one of four Fibonacci studies, including:

  • Fibonacci Retracements are horizontal trend lines drawn at Fibonacci levels along the base line.
  • Fibonacci Fans are diagonal trend lines drawn at Fibonacci levels along the base line.
  • Fibonacci Time Zones are vertical trend lines drawn at Fibonacci levels along the base line.

Unlike other Fibonacci studies, Fibonacci arcs generate dynamic support and resistance levels that change over time as the arc rises. The slope of the arc is a function of the base line and the time that has elapsed since the high point.

It's important to make sure that Fibonacci arcs fit with past price behavior in order to maximize the odds of success in the future. For example, the chart example below shows the Fibonacci arc serving as resistance in the past (late-February). This information may not be relevant to traders in the future (since it was in the past), but it helps ensure that the other half of the arc is more accurate in the future.

Fibonacci arcs are often combined with other forms of technical analysis, such as chart patterns and technical indicators, to maximize the odds of success. For example, traders might use Fibonacci arcs to identify potential areas of support and resistance, but wait until confirmation of a breakout from a reaction high before placing any trades.

Example of Fibonacci Arcs

The following chart shows Fibonacci arcs applied to the SPDR S&P 500 ETF (NYSE ARCA: SPY).

Fibonacci Arc Chart Example

In the chart above, the base line extends from the reaction high in late-January to reaction lows in April. The resulting Fibonacci arcs helped predict areas of resistance in late-April and mid-May, as well as support levels in early-May. Traders may also confirmed these support and resistance levels by looking at the 50- and 200-day moving averages or other technical indicators.

Chart courtesy of StockCharts.com.

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