Posted in Technical Analysis
By: Tom Gentile on May 23rd, 2022 • 4 mins read
You may have hears when it comes to technical analysis sometimes the patterns or setups become a self-fulfilling prophecy.
If Enough People Use the Same Analysis on a Security
The term self-fulfilling prophecy to me means there are enough investors and traders that see the same pattern or the same technical indicator (bullish OR bearish) that they make their buying or selling decision on that security around the same price point.
When a large enough batch of trades are getting made on that security at that price it moves the price higher or lower and therefor the pattern is deemed a successful one.
Fibonacci Retracement Levels
You can look up online the Fibonacci Sequence and the Golden Rule and get all kinds of details that explain as much as you want pertaining to Fibonacci.
There is a type of technical analysis, for those that choose to use it, called Fibonacci Retracements or Extensions.
We are only going to deal with retracements.
Two key retracement percentages used in Fibonacci analysis is the 38.2% and the 61.8%. One additional percentage used with most if not all software programs that include Fibonacci is 50%. Though 50 is not a number in the Fibonacci sequence enough investors and traders use it as a support or resistance that the software programs out there will include it.
Fibonacci Retracement in Uptrend
What the tools should do and how folks use it is they take the closing low of a security on what date and then take the closing high of a later date and plunk the Fibonacci retracement tool on the chart. They then look at what the software calculates price levels, and it will plot a horizontal line on the chart at the 38.2%, 50%, and 61.8% price point/levels.
One then looks to see fi the current price of the security is at (testing) or bouncing off either of those three levels higher. If so, that is deemed the security testing or bouncing off that Fibonacci support.
Fibonacci Retracement in a Downtrend
Do the reverse for a security trending down. Take the closing high of a past date. Take the closing price (lower) at a later date.
Have your Fibonacci drawing tool calculate and draw in the same 38.2%, 50%, and 61.8% price point / levels and see if the current price of the security is testing any of those as resistance.
If one doesn’t have a software to do this analysis one has to do all this calculations by hand. Hopefully, you found a software that has Fibonacci with it.
Figure 1 is where it was at the time of the writing today.
I am showing you an earlier date fib view on KO (Figure 2) where one can see it was testing at or between the 38.2% to 50% retracement before it’s move to current pricing.
After this next image I will present two more (Figure 3 & 4) that shows KO has successfully tested the Fibonacci retracement zones earlier this year as well.
Please Note: These illustrations are for educational purposes only and not to be construed as advice or recommendation to do anything with the security.
KO tested Fib retracement levels earlier this year in March so let me show you two images where that took place (Fig’s 3 & 4)
The reason I am showing you the two times this year KO responded positively off Fin retracement zones as to emphasize when you find a stock performing similarly and tests Fib retracement levels that those are worthy of consideration and worth talking to your brokers about as to whether they are worth the risk / investment or trade.
Both figures posted below.
I am showing in Figure 3 when KO tested the Fib zones/levels as support and in Figure 4 it shows what KO did after a successful test.
And here is what it looked like a week later and prior to where it was and is in Figures 1 & 2.
The number of days observed in each of the images above is 150-days.
You can adjust the amount of days in your Fibonacci Retracement analysis, but remember it is really only a self-fulfilling prophecy if enough people see the pattern / setup and react accordingly and along with enough others to make it work.
App: Toms Option Tools
Market Insight articles may show images of lists of stocks meeting a variety of options parameters like Unusual Call and or Put activity or Expensive IV found on my app Toms Option Tools.
Other times I will have other charts may work to amplify my educational points.
Those options data lists, however, can be found on my app Tom’s Option Tools. Use your device to search up and download this app and get free access to the Morning Reports section of the app.
Other parts of the app are available at a premium subscription rate, but the Morning Reports Lists are yours free.