Correct way to use Fibonacci lines

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  markd mod

  September 2020 edited September 2020 Answer ✓

  I'm assuming you've read the SC documentation for using the annotation tool, but for others, here's the link:
  
  https://support.stockcharts.com/doku.php?id=chartnotes:line_studies
  
  There doesn't seem to be a consensus on how to apply fib lines. Which low do you pick as a starting point, or which high? And there seems to be no logic to explain why they should work, other than the fib ratio occurs in nature a lot, so there must be something to it.
  
  One thing is clear, and that is fib lines do not function like a law of physics. There are no exceptions to physical laws (well, none that you can see without spending billions of dollars on amazing equipment). But stock prices will breeze past fib lines, or stop right on them, or go by them and then turn around, no matter how you draw them.
  
  So they would seem to be useless, but they are not. Prices do turn often enough at fib 23, or 38 or 62 that it's worthwhile knowing where those levels are. They seem to work best where price action itself suggests a turn. So, for instance, in a retreating up leg, if fib 38 is near a down close where price paused before going higher, that down close is more likely to be support again.
  
  Since fib ratios seem to be fractal - meaning they apply at any scale, you can choose to draw them anywhere you like. Your choice would depend on the type of trade you are looking for - short-term, medium term, long term - in the time frame you choose.
  
  A good starting point is a low - meaning a lower low preceded and followed by higher lows - and a good ending point is a high - i.e. a higher high surrounded by lower highs. The grid is "good" until the base - the low for an up leg fib - is broken. If the high is broken, just extend the grid to the new high. Look for possible reversals at the fib levels, typically 38 and 62. The types of candles you see at those levels, e.g. a doji, or a down bar closing up, etc. and whether there is support to the left, would help decide whether there is a reversal building.
  
  Here are a few examples from $SPX:
  
  Note there is actually no grid until there is both a low and a high, so the bars that matter are the ones that follow the high. Any intersections with the fib grid in the up leg (between the low and the high) have no meaning.
  
  
  
  
  
  
  
  
  
  
  
  

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  lmkwin ✭✭

  September 2020 Answer ✓

  In my opinion, there is really no application. It's just an indication of a retracement area. If you understand Stochastics or any other oscillating price indicator, you may note that they tend to be Bullish in appearance above the 40 or 50 level and bearish below the 40 or 30 level.
  
  The 50 level, depending on the settings of the indicator will be a reference for the 50% retracement. The 38 level, a 62% retracement. 75 a 25% retracement. The Fibonacci numbers and lines are just reference or alert lines to be aware of.
  
  I like Gerald Appel's "magic numbers". These are prices that he observed tend to provide levels of support and/ or resistance over time. I place them on all of my charts as Horizontal Lines. It's quite remarkable how useful they are to me. I used to put Price Channels on my charts, but using the Horizontal "magic numbers" cleans out the need for that indicator on my charts.
  
  I include a summary below:
  
  
  ARE THERE REALLY SUCH THINGS AS “MAGIC NUMBERS” IN THE STOCK MARKET?
  
  COULD BE. WHAT THEY ARE AND HOW TO USE THEM…
  
  Magic numbers? As we said, “could be”. Could also be just our imagination. But, we have observed over the years that certain areas, time and time again, serve as resistance points for stocks moving up and as support levels for stock moving down -- acting, so to speak, almost as magnets for price moves. Doesn’t work all the time, of course. But often enough to pay attention.
  
  CHARACTERISTICS OF MAGIC NUMBERS:
  
  I have observed empirically over the years that stocks tend to find support, at least temporarily in certain price zones, and to stop advancing at those same price zones, at least temporarily. In fact, I frequently use these zones as selling and buying targets as a result of my observations.
  
  These zones tend to be spaced roughly 15-20% apart from each other. Once a stock has passed through the zone, it generally moves rather rapidly, after perhaps a retracement to the top of the zone just passed, onto the next zone. Trading ranges tend to form between zones. Occasionally, false breakouts above these magic numbers do occur, but if the breakout is false, retracements back beneath the magic number are rapid, churning taking place near the top of the zone prior to a decline.
  
  Breakout buyers might purchase issues as soon as they cross through a magic number, or upon the normal retracement back to the top of the zone. Very frequently, a quick 15% or so ride develops. It can, however, be very dangerous to purchase a stock immediately upon its attaining a magic number, unless and until a consolidation period has taken place. Better to await a reaction to the top of the previous magic zone.
  
  WHICH ARE THE MAGIC NUMBERS?
  
  Give or take a fraction, perhaps 1 or 2 points on either side, the higher the price stock the greater the variation, these are the magic zones I have observed.
  
  8 20 ¼ 44 88
  
  10 24 ½ 49 ½ 99
  
  12 ¼ 28 ¾ 55 110
  
  14 33 65 130
  
  16 38 ½ 77 154
  
  In other words, if a stock crosses 28 ¾, you can be fairly certain of its attaining a price objective of 32-33, particularly if the break above 28 ¾ seems at all decisive. Should the stock reach say 29 ¾, it may retrace back to the 28-29 area, but could be purchased then for the move to 33, given no other contraindications. The numbers, 24 ½ through 65 seem particularly significant -- many declines halting at the tops of those zones and advances halting likewise, but just beneath the tops.
  
  By Gerald Appel
  as written in Systems and Forecasts

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