One of the best ways to trade stocks is by spotting support and resistance points.
It’s why so many traders use Fibonacci Retracement Lines – which is based on the belief that stocks will retrace prior moves. However, when it comes to Fibonacci, we’re not just looking for double, and triple tops, or bottoms. We’re looking at what happens at key retracement levels set at retracement levels of 23.6%, 38.2%, 50%, 61.8%, and 76.4%.
Once those levels are identified, we draw our horizontal lines at each marker to define points of support and resistance. Our overall goal is to then determine critical points of support and resistance.
Let’s use the wildly volatile Dow Jones Industrial Average (DJAI), for example.
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First, we identify the peak and the trough.
The peak was set at a high of 27,398, which was set in July 2019. Then, we find our trough, which was set in August 2019 at 25,514. Now that we’ve found those, we can move on to identifying our retracement lines, including 23.6%, 38.2%, 50%, 61.8%, and 76.4%.
Once we draw our horizontal lines, we can now see our key levels of support to watch for.
For one, we can see that a September 2019 test of a July 2019 high is leading to failure. We can also see where the DJIA has had – and could still find support at August 2019 lows. In addition, we can clearly see that the 38.2% level has also served as a hot spot of resistance.
Should the DJIA break down through its 61.8%, 50%, and 38.2% lines, the index could retest – and hopefully hold support at the lower support line.
However, we never want to rely just on Fibonacci Retracement lines. It is essential that you never rely on a single indicator. Instead, along with this indicator, pay attention to what the Bollinger Bands (2,20), MACD, relative strength (RSI), and Williams’ %R (W%R) are also telling you at key reversal points.
While such analysis can be confusing starting out, give it time.
You’ll be a pro before you know it.
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