Finding Fibonacci in various markets

Fibonacci lines are a vital tool in finding low-risk entry points in your spread betting, says John C Burford. Here, he shows how they can be used in any market.

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.

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:

12-10-03-MWT-1

(Click on the chart for a larger version)

12-10-03-MWT-2

(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:

12-10-03-MWT-3

(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.

12-10-03-MWT-4

(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:

12-10-03-MWT-5

(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 Advanced tramline trading An introduction to Elliott wave theory Advanced trading with Elliott waves Trading with Fibonacci levels Trading with 'momentum' Putting it all together

Don't miss my next trading insight. To receive all my spread betting blog posts by email, as soon as I've written them, just sign up here . If you have any queries regarding MoneyWeek Trader, please contact us here.

Recommended

Trading: cruise operator Carnival will party again – here's how to play it
Trading

Trading: cruise operator Carnival will party again – here's how to play it

Cruise ship operator Carnival shares are cheap and look poised to recover strongly. Matthew Partridge explains how to play it.
22 Sep 2020
Is it time to take profits on technology stocks?
Sponsored

Is it time to take profits on technology stocks?

With tech stocks continuing to slide, Dominic Frisby examines the charts and asks whether now is the time to sell.
14 Sep 2020
IAG's share price is ready for take-off - here's how to play it
Trading

IAG's share price is ready for take-off - here's how to play it

The owner of British Airways has had a turbulent year, but is now worth a punt. Matthew Partridge explains the best way to play it.
8 Sep 2020
Has the tech bubble burst? The week ahead could be critical
Sponsored

Has the tech bubble burst? The week ahead could be critical

Tech stocks have been in a runaway bull market, with the Nasdaq index doubling in the last six months. Yet we recently have seen something of a revers…
7 Sep 2020

Most Popular

How the stamp duty holiday is pushing up house prices
Stamp duty

How the stamp duty holiday is pushing up house prices

Stamp duty is an awful tax and should be replaced by something better. But its temporary removal is driving up house prices, says Merryn Somerset Webb…
25 Sep 2020
The electric-car bubble could get an awful lot bigger from here
Renewables

The electric-car bubble could get an awful lot bigger from here

The switch to electric cars is driving a huge investment bubble. But that’s not necessarily a bad thing, says John Stepek. Fortunes will be made and l…
24 Sep 2020
Can Rishi Sunak’s winter plan save the UK economy?
UK Economy

Can Rishi Sunak’s winter plan save the UK economy?

With his Winter Economic Plan, chancellor Rishi Sunak is hoping to support the economy through the dark months ahead as restrictions tighten again. Jo…
25 Sep 2020