A Fibonacci Look at the Stock Market

Tom Gentile

Posted in
Technical Analysis

By: Tom Gentile
November 15th, 2022

2 mins read

The equities markets have been on a nice run higher since the October lows.  The concern is this nice run could be putting the SPY, (our representation for the equities markets) in a situation where it is considered overbought.

When things get overbought the tendency is for them to eventually sell off.  The sell off could be just a sideways stall, a small or more meaningful pullback.

One thing to look for is where the security or securities are hitting an overhead resistance point/price.

That overhead point/price is where some selling may come in to the play and the security or securities retrace.

Figure 1: 150-Day Fibonacci View on SPY
Figure 1: 150-Day Fibonacci View on SPY

The trick is finding a potential price point where the current run is potentially going to atop and retrace.  

It’s at that price point one can sell and take profits on securities previously owned (or options).  It is a price point where one can consider selling a security short or initiating bearish option strategies.

Figure 1 shows a 150-day look at the SPY.  The Fibonacci Tool takes the closing high price and draws a line connecting to the closing low of that 150 days.

Securities do not go up or down in a straight line and you can see even in the downtrend there are up moves, come call up legs and down moves or down legs.

Figure 2: 100-Day Fibonacci View on SPY
Figure 2: 100-Day Fibonacci View on SPY

Fibonacci Cluster

A Fibonacci cluster is where more than one Fibonacci retracements or extension levels over different price swings and time frames convene near one price area.

The premise of a cluster is that multiple Fibonacci extension or retracement levels form at or near one price, that price is likely to be an important support or resistance area.

If you overlay Figure 2 on Figure 1 you would see SPY testing a Fibonacci retracement level for both, one at the 50% level in Figure 1 and the other at the 61.8% level in Figure 2.

Even though the percentage retracement levels are different, (because they are commensurate with the percentage level for the number of days chart the Fibonacci tools is placed on), the price for SPY that may be a more solidified resistance $401.75.

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