So Where Do We Land?
When the market tanked in March and April of this
year, I put up a weekly chart of the Nasdaq and showed you where the market was
in relation to two Fibonacci retracement levels.
During the summer, it never occurred to me that I’d be pulling this out of my
archives and showing you an updated version of it. But current market action
puts us within realistic striking distance of these key retracement levels.
Whether your analysis places a lot of weight on Fibonacci retracements or
they’re just an amusing curiosity for you, this chart deserves some
contemplation. Notice how the Nasdaq
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PowerRating) dropped down to the 50%
retracement level April, tested it twice, and then sharply rebounded–giving us
our summer rally. After fizzling out, the current plunge is taking us back down
toward the 50% retracement level for a potential retest. Because this level
provided considerable support back in April many traders will be expecting a
bounce there. But a decisive breakdown below it would be a big defeat for the
bulls. Such a breakdown would open the door to an attempt at the 61.8%
retracement level. The caveat to this is that using retracements is a tricky
business. There is always the temptation to predict where a bottom might occur.
Doing so, leads you down the path of trying to trade purely off these levels.
That’s never a wise practice. The best thing to do is to watch how price
action behaves as it reaches a retracement level. Let the patterns that develop
there tell you whether there are any opportunities.
Have a great weekend,
Eddie