Learning With Circuit City

  • May 30, 2002
  • Derrick Hobbs

I
look at six
key factors when scanning for long trades using Fibonacci analysis:

1) 
Direction of the immediate
trend must be up

2)  Stock or
ETF has to be in a pullback

3)  Pullback
is facing a Fibonacci price support cluster

4)  Analysis of time
axis of the market using Fibonacci tools points to a potential cycle low in
time

5)  Symmetry — where
the current pullback is similar in size to previous pullbacks

6)  Patterns in/around
our Fibonacci price support zone — two-step patterns, double bottoms, etc.

Below is an
example that fits all of my criteria. The immediate trend from the daily chart
is up. Circuit City
(
CC |
Quote |
Chart |
News |
PowerRating) has pulled back roughly
3 points from the May
15 high. The pullback has put CC in a key Fibonacci price support zone from
21.07-21.72. Time cycles are also pointing to a potential low in the next three trading sessions. Also, the previous decline was 2.7 points, while this one is at 3.0 points.
So, there definitely symmetry/similarity of declines in place. Finally, CC is doing a two-step pattern into the price support zone. This two-step pattern
is basically an Elliott Wave A-B-C (three wave) corrective move.

Now that all of that is in place, I look for a trigger to buy. If
filled, my stop would be just below the price support zone around 21.00. If
the current low holds, my objective on this trade will be the 1.272 extension
of the March 15 high to May 30 low, which would be right around 25.42.

Let’s say CC takes off to the upside, what does my money management look like? Well, I’ll
look to take part of my position off between the .50 and .618 retracement level
which is currently around 23.42. Then I will move my stop up to at least the
swing low, and possibly up to break-even. That way if CC goes against me I’ve
taken a profit and I’m positioned not to lose on the downside. Otherwise the
ultimate objective is the 25.42 level. Again, this is assuming today’s low holds. 

Derrik