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Figure 3

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The same type of Fibonacci analysis can also be very helpful in a declining market. Bank of America (BAC) rallied from a low in 2009 of $2.53 to a high of $19.86 in April 2010. If you were long BAC near the lows, the break of nine-month support (line a) at $14.46 in June 2010 may not have initially troubled you. However, BAC continued to drop and plunged more sharply in the fall of 2010, which must have made any longs quite uncomfortable. The eventual low of $10.91 was made on November 30.

At that point, anyone who had ridden out the decline was clearly looking for a level to get out of their long positions. Those who were comfortable buying puts or selling short would then be looking for a level to establish a short position in BAC.

Using the decline from the high at point 1 to the low at point 2, you get a difference of $8.95 ($19.86 - $10.91). To get the 50% retracement resistance level, you add $4.47 (50% of $8.95) to the low at $10.94 to get a target of $15.41. The rebound high on January 14, 2011 was $15.31.

This rally was a good opportunity to get out of any longs, and those who bought puts or sold short on the rally could have used a stop above the 61.8% resistance level at $16.47. As BAC dropped below the lows at $10.94, new Fibonacci resistance levels could be calculated from the high at $16.31. It had a low this week of $6.31.

Basic Fibonacci analysis can be used on any time frame and by any style of trader or investor. It is critical, however, to do your analysis on overlapping rallies or declines. I will often look at a daily chart to determine what I call the "minor" Fibonacci targets and then look at a weekly chart to determine the "major" Fibonacci levels to watch.

NEXT: Important Fibonacci Levels for Apple (AAPL)