It is my impression that while a significant number of commodity and forex traders use Fibonacci analysis as a regular part of their trading plan, many stock traders do not. If this is correct, I hope these articles will encourage more stock and option traders to use Fibonacci.

Many option educators concentrate only the option pricing, volatility, and of course, the various option strategies. I have heard some mention in passing that you should use technical analysis to find your trading candidates, but they rarely go into any detail as that is not the purpose of their presentation. I think applying Fibonacci projection analysis can be very useful if you are trading stocks, but even more valuable for option traders. This is because when you see a stock that is in a strong up or down trend, you can look for an interruption in this trend (continuation pattern) that you can use to determine both where the correction may end, as well as the trend's next targets. These targets can then be used by the trader to help select the strike price of the option and whether it is better from a risk perspective to trade the options or the stock.

So the first question might be how to select stocks for Fibonacci analysis. All you need is a stock that is in a good up or down trend, which can be determined as simply as searching for stocks that are up or down more that 35% in a six- to eight-week period. For this article, other than for the Apple chart below, I just went to Bigcharts.com and looked at the top sectors this year, then picked top performing liquid stocks from their list.

Figure 1 - Click to Enlarge

The stock I want to look at first is Apple (AAPL) since it has been a market leader for most of 2009. From the March 9 lows, AAPL rose from below $83 to over $135 by early May (point b). The first pullback lasted just five days, point b to c, and retraced less than 20% of the rally. The strong close at $130.78 on May 26, with 22 million shares trading, completed the correction. A rally equal to 50% of the rally from point a to b, and measuring up from point c gives a target at $144. This level also corresponds to the 161.8% retracement target using the correction from b to c (not labeled on the chart).

These targets were hit on June 5, point d, as APPL then turned lower and consolidated for five weeks, tracing out a flag formation. The continuation pattern was completed on July15 as AAPL gapped higher, closing at $146.88. The first upside targets were in the $152-$155 area, which corresponds to the 61.8% projection of the a-to-b rally and the 161.8% retracement of the d-to-e correction. More interesting targets were higher with the 50% projection of the rally from point a to d at $165, and then there was a cluster of targets in the $170-$172.50 area. This includes the 100% upside projection of the a-to-b rally, the 61.8% projection from the a-to-d rally, and the 261.8% retracement of the d-to-e decline. This grouping of targets might have had the option trader considering the 155 or 160 calls. AAPL hit a high of $172.49 on August 28, point 1, consolidated briefly before again moving higher. This had traders looking at the longer-term upside targets, ranging from $193 to $203. The most meaningful of these was the 161.8% projection of the a-to-b rally and the 100% projection from the a-to-d rally. AAPL's high so far has been at $208.71.

NEXT: Fibonacci Analysis of Alcoa (AA) and Expedia (EXPD)