Can a Support Price be Predicted Using the Fibonacci Sequence?

Since the October of 2023 lows for the Dow the market has been on an impressive, bullish run. 

Many market pundits have said the markets are over extended, (overbought) and due for a pullback.

I am authoring this educational article for you today, due to the Dow Jones Industrial Average breaking a 3-month ascending support line. 

If this break of support is going to bring a further price decline or pullback in the Dow, I want to assess to the best of my ability how far down it may slide before it finds a support.

The security I am using to chart the Dow is an ETF that has as its goal to track and replicate the performance of the Dow and that is the ‘DIAmonds,’ the DIA. This is the SPDR Dow Jones Industrial Average ETF Trust.

Up until three trading days ago, the DIA had been trading higher and looking like it wouldn’t stop.

What has happened, and one can see in the chart, is it broke support. Sometimes a break of support can happen one day, and the security goes right back above it and resumes its trend the next. This is known as a false bar/candle break down.

It did not resume its trend. At least not yet and it has now closed below that ascending support three consecutive trading days.

This could lead to further price decline.

Presidential Election 2024

One things I have been thinking about is will this market run up at least until the election results are posted and we announce our new President. A scenario I was wondering if it would happen is would there be a ‘Sell the News’ factor in that once the President is announced there is no more speculation to be had.

Have investors been buying up shares of securities in anticipation of their choice of President coming to fruition. And once that is announced, those who were anticipating their candidate winning finding out they didn’t will they start selling off their shares.

For that matter even those who had their choice of President win, maybe they too will take some profits off the table and look for a bit better pricing to get back in once the securities scale back a bit.

Whether this happens or not, we have to wait until November 4 and a bit after to see.

What is happening now is there already is some selling of securities going on. Some investors may be willing to take some profits and sell some shares of their holdings and not wait to see the outcome.

This is like someone taking off a trade prior to a securities earnings announcement.

The security may have ramped up going into an earnings report and rather than hold the security over the announcement they are going to be happy with taking profits, wait to see if the security pulls back after they announce and try to position themselves back in. AND if the security pops and they end up leaving money on the table so be it, they can always go find another opportunity.

My thing is I am preparing for the what if.

What if things go higher? I will maintain my existing profitable positions and manage them to my original plan at the time of my trade.

What if things trade lower?

That’s where Fibonacci comes in.

Fibonacci

The Fibonacci sequence is a series of numbers where each number is the sum of the two preceding ones, starting from 0 and 1. It looks like this: 0, 1, 1, 2, 3, 5, 8, 13, 21… and so on.

I encourage you all to look up and learn more about the Fibonacci sequence and you will find that the Fibonacci sequence is all around you. It  shows up in nature, such as in the arrangement of leaves, the spirals of shells, and branching in trees, as well as in art and design.

Fibonacci in Technical Analysis

When it comes to using Fibonacci in technical analysis, Fibonacci refers to a set of key levels (ratios) derived from the Fibonacci sequence.

These levels or ratios are used to identify potential support and resistance areas on price charts.

The three primary levels I start with are the 38.2%, 50%, and the 61.8% levels. Note 50 or 50% isn’t in the Fibonacci sequence, but it is such a widely used number / percentage all technical software’s I see have the 50% level in their software.

Keep in mind Fibonacci and these support and resistance levels have a habit of becoming a self-fulfilling prophecy, but like any technical indicator they work if enough people use them in pretty much the same manner. The more traders that use them the more often they have the tendency to work.

Below is the DIA from the October 2023 ‘lows’ to present day. Fibonacci takes the lowest close to a highest close of a range of days and derives the retracement levels from those two price points in an up or down trend.

Trust me, I am not saying the DIA will retrace down to these Fibonacci retracement levels. That would not be a welcome situation for any of us long the markets.

But I don’t want anyone to be surprised, least of all myself, so I encourage you all to do like I do and run these assessments so that you are not surprised and better yet, prepared to take advantage of these potential price moves should they become more and more a likelihood.

To your best success,

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