STRATEGIES

MoneyShow's Tom Aspray often uses Fibonacci analysis to determine likely entry points and profit targets for his Charts in Play recommendations. Here, he uses a few recent examples to examine more closely how he establishes these preferred buy levels.

In determining whether a market is likely to go up or down, I first look at the monthly, weekly, and daily charts. This step often is enough for me to determine which ones need more careful analysis.

In the second phase, on-balance-volume and relative performance analysis play a primary role, though other technical tools are often also used.

Once I find a market that I think has a high probability of going up or down, then further work must be done in order to determine an entry level, potential stop, and price objective.

I come across a number of markets each week that I think show a good potential to rise or fall 10% to 15%, but they are dismissed as they do not present any reasonable risk strategy at current levels. Often, I will determine that risking 5% to make 10% to 12% is not worth it.

When I am looking to buy or sell a market that is correcting against a major trend, Fibonacci retracement analysis plays an important role in helping me determine a possible entry point, as well as a profit objective.

In this article, I would like to review some current as well as past markets to show you the process that I use to identify a market to trade, and how Fibonacci analysis is included to determine not only entry but also exit levels.

Since the start of the summer, I have been watching the gold market, as I was aware of the seasonal tendency for it to bottom in the latter part of July. Since the highs in September of 2011, I have been looking for a correction within the major trend that would last long enough to reverse the extreme bullish sentiment that prevailed last summer.

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The major support level for the SPDR Gold Trust (GLD) that I identified soon after the top was the 38.2% Fibonacci retracement support level at $140, which was calculated from the October 2008 low of $66 and the September 2011 high of $185.85.

For those who are not familiar with Fibonacci analysis, a violation of this level would have indicated a further decline to the major 50% support at $135. (To learn more, read Fibonacci Analysis: Master The Basics.)

Next: Confidence in the monthly OBV