Precourse
Module 1 – How to Track Price Action on Ichimoku Charts
Module 2 – Finding Support and Resistance
Module 3 – Reading the Charts
Postcourse

Fibonacci Retracements Show Support and Resistance Zones

The Fibonacci Retracement technical indicator helps us to see support/resistance levels on both the weekly and daily charts. 

Our key use is to see where retracement levels and Cloud flat lines synchronize with each other. 

“For unknown reasons, these Fibonacci ratios seem to play a role in the stock market, just as they do in nature. Technical traders attempt to use them to determine critical points where an asset’s price momentum is likely to reverse.”
Casey Murphy. April 22, 2020. What Are Fibonacci Retracements and Fibonacci Ratios? Investopedia.

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Side Quest: What Are Fibonacci Retracements and Fibonacci Ratios?
Casey Murphy. April 22, 2020. What Are Fibonacci Retracements and Fibonacci Ratios? Investopedia.
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As noted in the Investopedia article, the levels are subjective. It’s best not to see the lines as solid lines but suggestions of areas of support or resistance. Imagine a small buffer both above and below each line.

Adding to that subjectivity, sometimes I will round up or down to whole numbers when drawing the lines rather than use the exact high or low. For instance, if the high we are drawing from is 34.89, I’ll use 35 as the top number. Or, if I am using a weekly or monthly chart to draw the indicator and the solid body tops of several candles are at around 40 but their upper shadows are higher, I’ll ignore the upper shadows and use 40.

Drawing Fibonacci Retracements on weekly or monthly charts to find long-range retracements is sometimes easier than using daily charts.

Chart settings I use: (arbitrary just my choices)
Daily 3-year
Weekly 10-year
Monthly 20-year
This just means on the daily chart the maximum it shows is three years back.

I use the charting platform ThinkorSwim so my examples will be from there, where I’m used to using the tool.

You can also use the TradingView.com website where you can use Fibonacci Retracements for free.

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Side Quest: Fib Retracement

TradingView.com Help Center.

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On the charting platform ThinkorSwim by Charles Schwab, you can find the Fibonacci Retracement by clicking on “Drawings” in the menu, then selecting “Drawing Tools” and choosing the “%” sign.

 

Here is the Visa weekly chart with the Fib drawn from 15.16 to 213.88.

Notice the topping out of the other candles at 210. The last red candle has a solid body that opened at 210. This is a case where we will adjust from the absolute top and bottom to round numbers. Right-clicking on the indicator allows us to adjust this to 15 to 210.

The reason for the change is humans tend to work with whole numbers so we change to reflect that. You might not find it necessary.

It’s not much of a change but look at the 38.2% level of both charts and notice the one below is closer to that flat Cloud formation. 

On the weekly chart below, look at the Chikou Span touching the 23.6% level twice before breaking through.

 

Here we are on the daily chart. We can see in May, the 23.6% level creating resistance stalling price action. With the most current price action, the 23.6% is the next support from below. Price MIGHT bounce off it if touched. 

The 38.2% level happens to fall where there was Kumo twisting going on back in November. The Fibonacci level being where this Kumo Twist party was happening is what we are looking for. The Fibs back up the idea that this area could serve as support if price falls this far.

 

This is an ETF that tracks Brazilian securities on a weekly chart. Notice the tops and bottoms and how they tend to fall near Fibonacci levels.

 
The daily chart shows resistance from the 50% level and support from the lower 78.6% level. There are lots of fluctuations around the 61.8% level and it doesn’t seem to be as powerful support or resistance as the other two.


“Remember … that markets usually retrace previous moves by certain predictable percentages–the best known ones being 33%, 50%, and 67%. The Fibonacci sequence refines those numbers a bit further. In a strong trend, a minimum retracement is usually around 38%. In a weaker trend, the maximum percentage retracement is usually 62%.”

John J. Murphy. January 1, 1999. Technical Analysis of the Financial Markets. Paramus, NJ, USA: New York Institute of Finance. 

Technically, the 50% level is not a true Fibonacci number. However, most trading platforms include the 50% retracement level because of historical significance.

Here is the Vanguard ETF for Midcap Growth. At the beginning of the chart, back in 2010, there is a very long candle shadow that caused havoc on the Cloud. We ignored the lowest low here and used the bulk of market action at around 43 as our starting point. With an ending point at 122, the 76.6% level starts as the first resistance area. After 3 years, the price gets above and starts on its incredible upward movement. The 38.2% level coincides with resistance during 2015. This chart shows a trading range that started in 2018 through 2020 between $103 and $122. The last pullback bounced perfectly off the $103 level which was also the bottom of the Cloud.

Here on the daily, you can see the support/resistance at the 23.6% level. At the beginning of the chart, where the 200 sma moves above the 23.6% level, notice the flat Cloud lines.


On this weekly chart for AAXN, the 78.6% area coincides with support for quite some time. On the upswing, the 23.6% level became resistance. A pullback to the 23.6% or 38% level could be a buying opportunity.



You can see the flat Cloud areas at the red arrows. The $66 to $70 area has been a support and resistance several times. A pullback to this level could be a buying opportunity. The arrows show where flat Cloud lines are in the 23.6% Fibonacci zone.


Of course, on all these charts, if there is a new high, the Fibonacci Retracement levels could be readjusted. That will change all levels showing how subjective this tool is. All levels should be taken as suggestions and not absolutes. It’s where the retracement levels corresponding with other Cloud elements that can help you gauge how strong a retracement from the highs might be.

The preceding examples show Fibonacci Retracements on long-term charts, usually starting when a long bull run had begun. Retracement levels can also be drawn using more recent highs and lows. This will give a tighter range of Fibonacci support and resistance levels. We’ll go over a few below.

“The idea is to go long (or buy) on a retracement at a Fibonacci support level when the market is trending up, and to go short (or sell) on a retracement at a Fibonacci resistance level when the market is trending down.”
April 10, 2018. How to Use Fibonacci Retracement to Enter a Trade. babypips.com.

There are many articles on the web on Fibonacci Retracements and this linked group of articles presents clear examples for applying Fibonacci Retracements. Follow the Side Quest for supplemental information on this topic. 

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Side Quest: School of Pipsology Fibonacci Trading
September 2, 2018. Fibonacci Trading. babypips.com.
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To find the most recent low, look on the daily chart for a major bottom. It can usually be found by looking for a large red Cloud formation.

An example is shown below for Applied Materials. Notice how this run-up market action pauses between levels. There was just a big sell-off down to the 38% level and the current action is hovering at the 23% level. 

Being under the Cloud, the long-term trend based on the daily Cloud is bearish, however, being above the 200 sma means the sma trend is still bullish.



We are still above the Cloud and 200 sma on the weekly so the weekly long-term bull trend is still in place. The first oval shows the longest flat Kijun-sen on the chart matches with the 38% level. Two other flat Kijun-sens that match a Fib level are also highlighted. If the price pulls back and finds support at the 38% level again, it also has the weekly Cloud as support.


This daily chart for Morgan Stanley shows several levels where flat Cloud lines match Fib levels.


This daily PayPal chart shows support from the Fib 50% level as well as the sma and bottom of the Cloud.


If you were interested in taking a trade here, fine-tuning your entry point can be done by looking at shorter time frames. Here is a 1-hour chart that shows price trying to get above the 1-hour Cloud. We’ll discuss using shorter time frames in a future course. Coming out of the Cloud would be the first sign, getting above the 1-hour sma would be next, then a free and clear Chikou Span would be supportive as well.

Multiple Fibonacci Retracements on Multiple Time Periods


You can use two retracements on one chart. Here is the E-mini S&P Index Futures monthly chart. Starting from the lowest low and drawing to the highest high we get a Fibonacci Retracement area of 11 years. The 38% level matches with a Cloud flat bottom so that area is of particular interest.


Take a look below at the daily chart’s large red Cloud formation from mid-November 2019 through to March 2020. The price action here just so happens to stall at the monthly 23% level then bounces off the 38% level. We’ll draw another Fibonacci Retracement starting at this big red Cloud up to the same highest high. 

The monthly 23% retracement is at the same level as the daily 61%.
The daily 50% coincides with flat bottom daily Clouds.
Recent price action pulled back to the daily 50% level then moved up and consolidated between the daily 38% and 23% level. We are bearish from the daily Ichimoku long-term trend and 200 simple moving average perspectives. The daily 50% needs to hold but the biggest support is the daily 61% which is also the monthly 23% level. A fall below this will be harder to recover from.


Here is the weekly chart that shows both Fibonacci Retracement levels. Currently, the Ichimoku weekly Cloud is support. We are still bullish from the weekly Ichimoku long-term trend and 200 simple moving average perspectives. A move into the Cloud would change this.

If you are enjoying playing with Fibonacci Retracements and feel they can be helpful, you might also want to research and play with Fibonacci Extensions.

The Difference Between Fibonacci Extensions and Fibonacci Retracements
“While extensions show where the price will go following a retracement, Fibonacci retracement levels indicate how deep a retracement could be. In other words, Fibonacci retracements measure the pullbacks within a trend, while Fibonacci extensions measure the impulse waves in the direction of the trend.”

Cory Mitchell. April 10, 2019. Fibonacci Extensions Definition and LevelsInvestopedia.

 

On this chart, let’s say you were checking it at the first of the year 2019 and saw the red Cloud. To create the Fibonacci Extension, you click three times which corresponds to the ovals. You can see how, in this case, the extensions do relate to future support and resistance levels.


On this weekly chart for the total stock market ETF VTI, when the Fibonacci Extension was put in after the red Cloud appeared, the 261% level almost perfectly predicted the high. When the Fibonacci Retracement, in pink, was drawn on top of it, the 23% level of the Retracement fits with the 161% Extension prediction. In this case, both Fibs support each other. The 100% level of the Extension also fits with the 38% level of the Retracement.




The charting platform used for this analysis is provided by Charles Schwab and is called TOS or ThinkorSwim.