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.
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.)
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