Today I go off-piste and show a few markets where Fibonacci retracements have pinpointed great trade entries. This should help any trader spot low-risk trades.
As you know, I love using my Fibonacci tool and will apply it whenever I suspect there has been a recent turn which gives me the second pivot point.I do this on any timeframe chart.
Let me give a few examples.
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Nikkei versus Dow
The Nikkei is a widely traded index of major Japanese shares. It is considered the Dow Jones Industrial Index of Japan. You would think that since the world's major economies are globalised and inter-connected that the world's stock markets would move more or less in synch.After all, a slowdown in the USA and Europe should result in a similar move in Japan and China as these countries are export-driven.
But compare the Nikkei with the Dow on these daily charts going back to the pre-credit crunch days:
(Click on the chart for a larger version)
(Click on the chart for a larger version)
Following the 2007-2009 collapse, the Nikkei managed to rally to the exact 38% Fibonacci level (blue bar) and had declined ever since. That was agreat place to short the Nikkei.
In the Dow, we saw a similar collapse, but the Dow rallied to a deeper 62% Fibonacci retrace before hitting resistance. That was also a great place for a short trade.But here, the Dow has rallied, unlike the Nikkei. Maybe markets are not so inter-connected after all.
Let's take a look at recent action in the Nikkei:
(Click on the chart for a larger version)
The decline off the April peak is a clear five-wave affair complete with a positive momentum divergence at the wave 5 low.That is pure textbook and indicates the main trend is down.
But when you see this pattern, you know a rally lies ahead and it becomes a good idea to cover shorts.
The first rally carried to the Fibonacci 38% retrace (blue arrow) and after a series of overlapping waves (indicating a likely pause in the bear market), the market made two stabs at the Fibonacci 50% level (blue bars) and is currently challenging recent market lows.
The rallies to the 50% level were ideal places to enter short trades, of course.
I find that the shallow 38% retraces normally indicate a prompt resumption in the downtrend, while the 50% and deeper retraces normally indicate more work before the bear market can get back on track.
EUR versus USD
The euro has been in a bear market for some time, but with a recent large correction.
(Click on the chart for a larger version)
Following Monday's 1.28 low a new low for the move - the market this week has rallied in a clear A-B-C form (indicating a correction), and the market made it back to the Fibonacci 62% retrace with a slight overshoot (purple bar).
These pigtails' are quite common and usually mark the end of the move.
Again, a short trade at the 62% area was indicated.
And finally
GBP versus USD
This market has been swinging wildly recently with no clear direction, and here is the action over the past few days:
(Click on the chart for a larger version)
From Friday's high, the decline occurred in five waves: with a nice positive momentum divergence at wave 5; then a rally to the 36% Fibonacci level; then a dip; and then a run up to the 50% level.This last run completed a nice A-B-C (purple lines) corrective pattern.
The odds favour a declining market, which would be confirmed by a move below Monday's low and in fact as I write, this move has just occurred in the past minute!
In these posts, what I write can very quickly become out of date!
But I hope you can see that using these simple ideas could give you terrific low-risk trade entries.
If you're a new reader, or need a reminder about some of the methods I refer to in my trades, then do have a look at my introductory videos:
The essentials of tramline trading
An introduction to Elliott wave theory
Advanced trading with Elliott waves
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