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Definition: Retracement

A reversal in the movement of a stock's price, countering the prevailing trend. The reversal can move higher as well as lower.

The Theory

Rule #1 - Always BUY on the Low Pivots (left side), and always SELL on the High Pivots (right side)

Retracements are most useful with stocks that are volitile - or with seasonal stocks that tend to swing higher or lower during the year.

Retracements never occur in a straight line - that is, a stocks price rarely goes straight up, or straight down. In addition, for investment purposes, it is helpful to have some way to measure the possible stock price movements. For fibonacci analysis, we use historical High and Low prices for a specific time period - typically a month or less for volitile stocks, and a year for seasonal stocks.

Once we have our High and Low (the range) we can

project potential price movements (retracements) based on standard fibonacci percentages
determine key price thresholds that usually indicate direction momentum
In practice, there are several methods of choosing the High and Low. However in general, it is the monthly High that provides the greatest accuracy in projecting Downtrend retracements. However for volitile stocks, it is a good idea to compare price Highs and Lows for 4 time frames.... 1 week, 2 weeks, 3 weeks, and a month.

The greater the difference (range) between High and Low, the more accurate the Fibonacci pattern.

Key Indicaters

As always, fibonacci percentages are accurate when there is no dilution/NSS occuring.

The standard 61.8% and 38.2% pivots are important indicaters - for a total of 4 pivots. Potential reversals are most likely to occur on both these pivots. In addition, these 2 pivots represent BUY signals.

The Low Pivot (left hand side) represents the possible lowest BUY signals.

The High Pivot (right hand side) represents the possible highest BUY signals, as well as the highest SELL signals.