Today’s Trading Lesson From TradingMarkets
Editor’s Note:
Each night we feature a different lesson from
TM University. I hope you enjoy and profit from these.
E-mail me if you have
any questions.
Brice
How To
Time Individual Stocks Using Fibonacci Price Analysis
A question I am often asked is whether or not mycolor=#0000ff> “Fibonacci work” is valid or valuable when applied
to individual stocks. The answer to this question is
YES, as long as there is adequate data with well-defined swing
points. Since it is difficult to explain what “well-defined swing points”
are, let me just say that most stocks can be analyzed with this method. The
exceptions would be those stocks that have just been color=#0000ff>”born” and have little back data, or bulletin board
stocks which are erratic.
Let’s take a look at a few examples of Fibonacci price clusters at
work in a few well-known stocks starting with Microsoft
(MSFT).
I apply the same principles I use for analyzing stock indexes and
commodities when I am looking at an individual stock. I look at trend, pattern,
price and time. For this article, my focus is on color=#ff0000>PRICE. In the MSFT chart below, I saw a pattern of
higher highs and lows (in other words the immediate trend
was up). I started setting up my Fibonacci price relationships for a
potential entry in the direction of the trend in this stock. Two zones stood out
immediately as I did this work, as they centered around the color=#0000ff>100% price projections of the prior corrective
declines. These zones came in at 57.98-58.60
and at 57.06-46. Note that a low was made
directly within the first price cluster zone at the color=#008080>58.10 level.
src=”https://tradingmarkets.com/media/cboroden/msft.gif” width=519 border=0>
Next, let’s take a look at a daily chart of color=#008080>AOL Time Warner (href=”goto~www.tradingmarkets.com~redirect.cfm?symbol=AOL”>AOL).
One of my favorite reversal patterns that often shows up in stock
index futures and other commodities showed up in this stock. Here, we saw a
“two-step” correction, which is sometimes
called a “Gartley” pattern, into the
coincidence of four key Fibonacci price relationships. The price cluster came in
between 29.12-29.59. The actual low in this
case was made at 29.39. Now how would you have
traded against this “cluster zone”? Let’s move
on to the next chart, and I will give you some ideas.
src=”https://tradingmarkets.com/media/cboroden/aol.gif” width=519 border=0>
Once you knew you were moving into a key support decision in this
stock, you could go down to an intraday chart (five-minute
in this example) and look for an entry “trigger.”
After this stock started trading up from the color=#008080>29.39 low, which turned into support, you could have
used the prior swing high on the five-minute chart seen below as your color=#0000ff>“trigger” for an entry on the buy side.
src=”https://tradingmarkets.com/media/cboroden/aoltrigger.gif” width=518
border=0>
What about the daytraders that like to short stocks? For those, I
have a nice example in Nokia (href=”goto~www.tradingmarkets.com~redirect.cfm?symbol=NOK”>NOK).
On Sept. 25 I saw this stock test
and stall against a “triple price cluster” of
resistance at the 17.49-66 area. After this
stall, you would want to look to your short-term charts for indications of a
reversal against this resistance.
src=”https://tradingmarkets.com/media/cboroden/nok.gif” width=522 border=0>
If you went down to a five-minute chart on this stock, your first
violation of a prior swing low that would have suggested a short sale came in
with a break of the 17.17 swing low. A healthy
decline followed this “trigger.” Your initial
risk would have been defined above the high made into the cluster at color=#008080>17.49. Although the “price
cluster high” was retested after this break, the key high (where your
stop would have been placed above) was never violated.
src=”https://tradingmarkets.com/media/cboroden/noktrigger.gif” width=518
border=0>
***Update to AOL setup: After this article was originally
written, I went back and checked the AOL chart. So far we have seen a rally to
39.21 from the 29.39 price cluster low!
src=”https://tradingmarkets.com/media/2001/cboroden/aol2.gif” width=520
border=0>