Fibonacci Retracements Explained | Swing Trading (Days to Weeks)
well the market over the last week had a swing failure to the upside with the exception of one of the major markets the nasdaq barely made a smaller higher high but as we start the earnings season and we see some of that price action going back and forth may fibonacci retracements kind of give us some ideas of some levels that need to break to demonstrate a possible reversal of the current downward trend stick around [Music] okay it's great to see those of you that are live with us today uh such as sandy vijay we got wayne uh kabuchi paul uh let's see we also got jerry with us along with rice russ sorry i have rice on the brain i guess i had some indian food yesterday we also have uh bryson javier tm on board and we have mr cameron may helping out on the chat do appreciate him being with us today a lot of you may be familiar with cameron in the getting started with technical analysis webcast every monday at 11 a.m eastern time he also has several webcasts as well tied to options make sure you take a look at the schedule to see the latest and greatest from cameron thank you cameron you can also follow us both on twitter now you'll see my twitter handle on the bottom of the screen throughout the presentation at j mcnichol underscore tda cameron's is at cma underscore tda it's a great way to learn more about your instructors as well as about the markets as well let's go ahead and get through our disclosures folks get into our content for today which is for educational information purposes only and not investment advice or a recommendation of any security strategy or account type options not suitable for all investors spread straddles other multi-leg options strategies often involve greater more complex risk than single-leg option trades include multiple commissions which are important factors should be considered when evaluating any trade you're encouraged practice which you'll learn here today with tools such as paper money software which again is for educational purposes and successful virtual trading during one time period does not guarantee success of actual funds during later time periods market conditions change continuously make note if you are trading options with both long options as well as short options there's a risks associated with both sides long options the entire cost of the option is at risk that's why appropriate position sizing is uh certainly a consideration there likewise with short options they could be assigned at any time regardless of the in the money amount now while this webcast may discuss technical analysis other approaches including fundamental analysis may assert very different views and we will be demonstrating the functionality of the platform we'll be using actual symbols keep in mind td ameritrade does not make recommendations or terms ability of any security or strategy for individual traders any investment decision you make in your self-directed account is solely your responsibility there's a brief bio you can see my background there as far as with education here with td ameritrade likewise as far as what i teach and uh certainly uh some of my background there and likes hopefully i'll get an opportunity to share some of those additional likes uh on twitter haven't found too much of an opportunity to do that uh keep busy uh not only here but also with some of my military endeavors there uh let's go ahead and talk about our agenda folks we'll be reviewing current market conditions but will also be put in the context of our second uh agenda item which is exploring the fundamental elements of fibonacci retracements applying them not only to some of the market indices to get an idea of some of that bias as far as trend support and resistance seeing is that swing traders typically trade within different price ranges fibonacci tools can be a way of possibly clarifying some areas of support and resistance likewise when prices break out and looking for potential targets over the near term near term may be a helpful tool now i'll also highlight not only utilizing the fibonacci retracement tool which is be our primary tool for this session there's other fibonacci drawing tools and uses for them we will focus on fibonacci retracements that's basically prices pulling back in the context of a uptrend or as we've seen more likely recently uh retracements to the upside in the context of a downtrend okay basically retracing that previous move we'll also utilize kind of an underutilized tool and you know not as many people may be familiarized with it but we'll also use on thinkorswim there's been a fairly recent addition called fibonacci patterns kind of an add-on to some of the price pattern tools that are on thinkorswim we'll kind of apply that and it may be kind of a starting point or uh at least a beginner tool for those of you that are fairly new to utilizing fibonacci we'll cover down on that as well all right so without that let's go ahead and take a look at the thinkorswim platform starting off with the s p 500 and we'll apply this from a longer term or a relatively longer term standpoint and and also look at it from a standpoint of near term shorter term since swing trading does focus on days to weeks we may be focusing on some of those recent periods of time but seeing the forest for the trees those of you that follow me on a regular basis are already familiar with this chart and some of the levels that are referenced here basically looking at the rally from october of 2020 to the highs of december going into the end of the year of 2021. this is an example of a fibonacci retracement that's displayed here now if i was to go ahead and draw this from scratch i'm just going to right click on the existing line there and we're going to remove that drawing and i'm going to go ahead and go to the drawing tools and under the drawing tools you'll see a percentage icon that is the fibonacci retracement now notice there's actually some other tools extensions uh which will highlight a little bit in some of the pattern tools later there's other times fibonaccis that look at time series as well as looking at different ratios and even looking at things such as arcs and different fan lines or trend lines spirals and really what they're doing here and we'll apply this in the case of the fibonacci retracement i'll click on the percentage and what i'm drawing is i'm drawing from a low to a high now in the context of retracements what the traders are typically doing is looking for pullbacks that are in that trend in a bullish trend i should be going like this in a bullish trend looking for those retracements prices that are pulling back preferably making a higher low with the expectation that it'll swing up and make a higher high and so fibonacci retracements are typically drawn with that prevalent trend now as we go back and look at this in the context of the spx now if i wanted to and some investors and traders may do that you know they may go ahead and draw from the very low in the trend that they're observing and go to the higher high but there is a reason why focused around this october time frame uh notice that's around where some previous highs were at previous highs can act as new support so previous resistance can act as new support we can kind of see that in this area here uh also since there was more of a consolidation think price patterns rectangles triangles and the leg let's go ahead and draw a horizontal line represent that bear with me for a moment for some reason it won't change on me it's because it's kind of stuck let's hit an escape key here all right one more time there we go so kind of looking at a little more of a a rectangular pattern in this area here and so i was looking at the low preceding the breakout of the last upward movement of the s p 500 so go into the drawing tools and again selecting that fibonacci retracement drawn from the low preceding that breakout and going to the high now this is just one technique as i'm trying to get that line to stick that's just one technique i've utilized fibonacci and uh studied it going back believe it or not about 30 years uh as uh computers were kind of more coming online some of this stuff actually had been drawn by hand and required a little more effort now fortunately uh the tools at least they were pretty expensive at the time uh were becoming to be more and more available when i started into this endeavor here now notice when we went ahead and drew that fibonacci retracement and we'll kind of zoom in on that you'll see these different percentages that appear uh over on the left-hand side here you may also visualize them in different ways but here are those percentages now from the concept of fibonacci some of you may know the theories that are tied with fibs if you go ahead and start off uh you know with a one uh you know one plus one uh equals two uh and then take those numbers and see sequence and add them together 1 plus 2 is 3 2 plus 3 is 5 3 plus 5 8 and then if you add those numbers you have things such as 13 13 21 34 55 and and so on that's why you'll see me utilize and you'll see other indicators possibly utilize those fibonacci numbers okay now if you divide those numbers into each other you'll also come up with different ratios and on the fibonacci retracements the 23.6 the 38.2
61.8 uh 50 78.6 are all different fibonacci ratios now the 50 percent is actually not technically a fibonacci level it is in our purposes here and one of the reasons is there has been application of that with dow theory as far as with overall trends when they may sell off it's fairly common that you may see retracements of around half of that previous move and notice as we look at the s p 500 when prices did start pulling back and that's usually the consideration on when to draw those fibs because as those prices are pulling back is look to see well is there a potential area of support this could be possibly helpful for a swing trader notice this as the market did sell off uh from that go into that 23rd retracement and we'll kind of zoom in on that area bear with me for a moment this is a quarter retracement right here where my mouse is pointing now notice we had a pullback uh price violated that level it didn't quite hold it also took out a previous low not positive for a swing trade now this is looking at a weekly chart keep that in mind but one can trade weekly swings as well uh notice uh prices did come down to that 38.2 level and we see a hammer in
formation now that is a a bullish formation there and then notice there was follow-through the following week as prices traded and even closed above the high of that previous week bulls being optimistic but notice that was short-lived as we see the beginning of a swing failure you know buying the dip which had worked out smashingly well in previous years started to fail here prices roll over we can go ahead and see another attempt by the bull still trying to be optimistic and hold that third level okay this is a double bottom ready to buy with both hands okay that's in brackets there okay that is not a recommendation but that's a saying uh that some traders when they're overly optimistic uh but here price has made a lower low not an even attempt for that to hold but still trying to hold that third retracement now notice you see a pattern such as a descending triangle form in there and shorter term averages falling we see an intermediate average flattening out so if prices were to break down that could be more of a bearish opportunity to go down to the next level well what is that next level there's a 50 percent level in this case down around that forty twenty six as we go forward notice there was a bounce here a weekly reversal and again traders looking to be optimistic and seeing if they can go ahead and take out those highs so after testing that tried to hold keep going forward here and then notice price going a bit more sideways here as we came into that march time frame continuing on there's the violation of that fib looking for the next level down notice that 50 percent attempting to hold attempting to hold looking for a bullish bounce not seeing it until that following week so notice how these can be some inflection points now kind of fast forward to where we are right now another significant level is this 61.8 retracement notice i have this example in gold and when you do go ahead and draw these lines if you wish you can go ahead and right click on that select edit properties and you can go ahead and color code these levels any way you wish i made the 61.8 gold so as far as the fibonacci world this is what's considered to be a make or break point for a trend uh if this uptrend is to hold and continue want to remain above that 61.8 now notice we did have a violation of that several weeks ago at least for one week and prices are still trying to hold on to this area however relatively weaker if we fail to hold this week as we go into earnings you know is there potential for prices to retest those previous lows and possibly come down to this next fibonacci area once we're below this area and the longer it stays below there may increase the probability of prices fully retracing back to previous lows notice this low corresponds with the previous breakout for the s p kind of close to that 3600 area this may be an inflection point that traders may be keeping an eye if we see some continued weakness here and come in days and weeks okay as we go a little further and kind of focus it on a daily time frame notice you can see those longer term fibonaccis showing up on the chart and notice how they've come into play here in multiple ways kind of a hammer in formation here on the s p notice the gap gaps can act as support and resistance and then notice we're kind of needle in we kind of threading the needle here back and forth over the last couple of weeks uh as what are some catalysts traders and investors looking to see if that cpi print is going to be a peak for inflation over the near term what is the impact of earnings as far as with the dollar uh with inflation and buying and selling patterns so knows we're seeing a bit of a squeeze here or a triangle pattern something we talk about in breakdown reversals that's tomorrow at noon eastern is looking to see where that break may occur if we break to the upside that would be a potential bullish reversal if we break below possibly a continuation to the downside now again we're focusing more on this longer term what over the nearer term well notice as we look at the price action the trend has been to the downside so can we isolate fibonacci from a bearish perspective we looked at from a support what about resistance well we do the same principle we take the drawing tool take that fibonacci percentage and now we're going to draw from a swing high down to a swing low and here's a little more uh detail here at least over the near term i'm going to click on the high draw it down to the low as we try and make that stick for some reason my mouse let me have to clean up my mouse here now i want to do uh as far as practicality i'm going to go ahead and remove this longer term one so we can focus on the shorter dated one sometimes you can hide them temporarily but i'll just go ahead and redraw that later so now you can look at these fibs as potential areas of resistance as it rallies higher notice the last bounce on the spx rallied up to the 50 percent and even got close to that 61. here's the potential near term maker break point for a bullish reversal if we're able to break above that level notice a few things would be accomplished one a successful swing high to possibly breaking the trend and getting above a major moving average in this example a 55 period exponential moving average that we've used in this class as well as others to represent that overall trend okay so kind of the pivot area to be keeping an eye on now if one was looking at it from a matter of an extension let's say one was bearish and looking for prices to be going lower so what i'll do here and what some traders may do if they do not like the fibonacci on the chart and obviously i'm a little biased why wouldn't anyone love to see fibonacci on the chart you can go ahead and take a horizontal line and go ahead and plot it you know add a key point or two you'll have to make note uh that you know that's your fibonacci range and here i just looked at that 61 and that 50 point area as resistance then you go back and right click and remove that so we can see a resistance area that we're looking to breach an extension is another tool that we have and that would be the one that's right next to the fibonacci retracement if i click on that this is going to be used somewhat similar to the fibonacci retracement but instead of going from point a to point b which we'll do it's actually going to need to go to a point c so we basically measure the same swing down we click and then we go up to that high kind of like a bull or in this case a bear flag and then what that will plot is extension levels if the price was continuing to fall is where some likely potential targets may be if one extends this out basically the 100 level would be a similar swing to the one that we measured so if one was looking for targets they may be targeting the previous low or possibly targeting down to the previous swing down okay now let's take a pause here see if we have any questions do appreciate the feedback and do appreciate cameron helping out on the chat there as we talk about fibonacci retracements and how they may play in as we're seeing with the market currently we'll look at this on some individual stocks here in a moment and uh looks like uh there's some additional news uh that may have uh came out cameron's doing a little research on it as a right up to the time we looked at i didn't see anything that stood out although there may be concerns as far as with again with things slowing down let's look at the interest rates yields have been a bit of a draw as well uh yields have been rolling over now looks like they may be trying to tick up right now so we look at the nasdaq nasdaq rolling over as well now as we look at the nasdaq as i mentioned at the beginning although it doesn't quite look like it the nasdaq was the only index that did have a technically a successful swing although you have to squint at it prices did take out that previous high albeit entry day we did not have a higher close so notice we're seeing some more firmer resistance there however even though with prices pulling back are we still potentially looking at a higher low which can still set up for a bullish reversal however the inverse of that is if kind of that shorter term levels get taken out this could be a more of a rising wedge or triangle prices breaking down may look to potentially retest those lows i'm going to go ahead and notice we have some of those levels on there if i go to the drawing tools and draw the same fibonacci level we did with the s p with this recent swing down you can see how the nasdaq as well that's 61.8
a make or break area for a bullish reversal still has yet to break out so again notice how fibonacci correlating with some of those previous highs and what would have to be setting up for a bullish case if prices were able to break above and hold if they still fail to breach that level the trend is still intact and those prices are below the 50 percent even below the 38 percent which may look to possibly retest some of these levels okay we're still in the midst burning season so uh we're just getting started so expect to see some volatility as we see those price actions continue to develop all right now let's go ahead and apply this to some individual stocks and and how it may be tied into a trade i've been doing a workshop uh for advanced option strategies we started that last night that's still available we're talking about iron condors tonight it's a live event so those are not recorded unlike these sessions here but you're welcome to go to the events page there has been some problems with the links though uh so if you do not get a link just go to that same events page when the session starts tonight at 7 pm eastern time and you should be able to access directly from that events page but i digress there for a moment i'm going to bring up the back on the thinkorswim platform a couple stocks uh was looking at prior to us getting started here let's take a look at uh cvs now as we look at cvs we can see an example of a previously or has been more of a downward trend now if i look at this from a longer term standpoint and go up here you know we can see from a longer term you know kind of price action uh with a channel i previously have drawn had found some support now was there a fibonacci case for uh this stock well if i go back and look at a low previous to the breakout which continued this trend this is a bit earlier on for cvs back in april of 2021 i can go ahead and draw from the low to the high and notice we see a hold at that 50 percent retracement level notice that kind of coil has a confluence with some previous highs in that previous breakout okay now some traders uh you know if you go uh you know what if you draw from another low uh you know let's say you draw back and you this is the load that you recognize from the most recent swing up well you'll still have fibonacci ratios they just may line up a little bit differently as far as with the number uh notice in this case instead of the 50 percent we see the 61.8 which happen to have violate that temporarily testing the channel but notice we had a bullish reversal around that area signifying that this longer term trend is still intact now as we go ahead a bit closer from a swing trade in perspective and notice that 50 percent kind of acting as a little bit of resistance there some traders may be looking for a breakout of this level as a confirmation that this trend may be reversing notice the next fibonacci level in this case is at around 99. now as a a practice trade that i believe uh did last night it may have been off a little bit but here i have an example of a long call vertical we're an example of buying a 95 strike and target in the 100 strike a limited risk bullish example trade well why what's the consideration for that well the idea is the expectation that price breaks out which it did but we're seeing a little bit of a fade as some of the markets sell off okay but notice that hundred dollar level is pretty close to this next fibonacci level so this is where some traders may look at ideas for potential price targets and notice that has a correlation there with some of these previous highs that would make for a successful swing trade if prices are able to trade that level looks like things have faded a bit that's one of the drawbacks if one initiates a trade earlier in the day looks like you're a hero and it may end up being a bit of a zero at least for the time being okay uh traders may be waiting for more of a confirmation of the close above the high of that day all right so that's cvs being one of them and there's gonna be a common theme with a few of these as many more stocks have sold off let's see i think was looking at gilead as well gild you know if i look at this from even from a shorter term drawing from the high down to the low notice as we look at that 61.8 retracement kind of a make or break similar to what we're seeing with the market we're seeing kind of high in the needle so to speak kind of squeezing and going back and forth okay now unlike other stocks this stock happens to be somewhat above its 50-day moving average in this case a 55.
so traders may be looking for a break to the upside as a sign of that bullish reversal whereas a rejection of that 61.8 may be a continuation to the downside although as far as with gilead uh things can obviously uh reverse we do have earnings coming out towards the end of july but notice a pretty strong counter move uh upwards here as price is attempting to recover and kind of a more a consolidation which may point towards a continuation if prices go ahead and break higher okay so hopefully you learn in a bit as far as applying uh some of these fibonacci tools now you know unlike you know some other indicators uh that may be less objective such as a moving average crossover or a macd crossing the center line uh when it comes to fibonacci remember these are drawing tools and so there is a little level of subjectivity but we can still apply a consistent and maybe a rules-based method as you've seen with a lot of my examples i focused on some of the more recent swings on whether looking on the daily charts but may look further out on the weekly charts and isolate that longer term trend particularly the last run-up or the previous run-up uh in a lot of these markets a lot of that goes back to october again of 2021. you can apply that same principle on some individual stocks now the last thing i wanted to share with you is on thinkorswim there is a tool that's called fibonacci patterns some of you may have already utilized the patterns tool for other instruments looking for triangles rectangles or the candlestick function that we've utilized such as the williams fractal this can also be a helpful uh tool on kind of correlating the highs and lows and where one may draw some of those fibonacci areas now again just so as i talk through it if we go to patterns we go to select patterns under candlestick williams fractal this has been a commonly used tool in this webcast and when i've taught technical analysis in the workshops we double click on it to add that remember this is an indicator that basically focuses on looking for those candle reversals which are common signals for swing traders now these are not real-time signals they'll lag a period but traders may use that for back testing or to recognize support and resistance notice i just basically connected the dots of these fractals i didn't have them drawn before i did that and that can help identify those patterns and then notice as far as from the fibonacci uh application as well there's the fractal from the high and going down to the low of this last major swing down fractal's actually being hidden by that low number now if i go back to the patterns and go to select patterns there's another tab here for fibonacci don't have time to go through each and every one of these individually i don't think it's important for our discussion here i will share a resource with you but what we will simply do is we'll double click and add each one of these and really what they are is they're examples of extensions or retracements of different trends now much like the patterns tool looking for triangles rectangles and the like on the thinkorswim platform this is certainly by no means a perfect indicator none is but this may be kind of helpful uh to maybe back up maybe some of your analysis on fibonacci as you learn utilizing that retracement drawing tool uh and likewise i may be able to identify some support and resistance levels practicing with this tool so i've added uh all three of those now there are some settings the default settings uh are oak correction let's back out of that on the fibonacci settings very similar to the patterns tool where you can select a length we'll leave the default settings in here so looking at smaller periods up to very larger ones i do not find much use in applying the quality filter there it seems to filter out more than necessary and you can also choose on which fibonacci levels to display we'll leave all of them on there and we'll click apply we'll click ok and make sure we have show patterns uh selected now as i go back and look at gilead notice it's not necessarily reflecting the fibonacci levels that we went ahead and put on again kind of pointing towards some of its uh application here in fact probably have to go out to a longer term chart on a daily to probably visualize that possible larger pattern in this case in gilead the last time it plotted something was going back to early 2022 where this swing failure had broken down also not every symbol may come up on this okay usually it's going to be some of the more widely traded stocks i'm not sure maybe gilead fell off the radar there but let's bring up another stock such as apple aapl okay and the one on apple actually is a good representation of a of a potential retracement here it'll actually plot previous patterns if you highlight them it'll give you those fib levels however by default only the most recent pattern is being displayed in this case looks like it is this last downward move so notice as we look at apple potentially form in an inverse head and shoulders shoulder head shoulders at least a rectangle and notice kind of the things we've talked about in this class on looking for a potential reversal would like to see those moving averages cross each other to the upside and take out those previous highs and as i we kind of look at that level you have to put your cursor on it you know there's a a 38 retracement which is acting as resistance and then you got the 50 followed by the 61.8 so if prices were to break out you know these could be some near-term targets all right uh let's see i was looking at um you know the travel the travel industry uh has been demolished uh although with uh crude dropping we have seen some bullish reversals as far as price although a ways for a bullish reversal here on carnival cruises there again there's a fibonacci retracement going from the high to a low and you can highlight and see some of those levels notice the 38 was resistance here's the 50. here's the 61.8 notice it's a bit of a confluence with that make or break and that's 61.8
uh that's 61.8 in that moving average as far as signs of a bullish reversal whether this turns into be a double bottom until then this would be a counter move as far as potentially targeting some of those levels longer term looking for it to break and hold above those areas okay uh let's see uh tesla tsla and just want to kind of show you the good the bad and the ugly not that tesla's ugly but you know as far as patterns you know the last time that tesla updated a pattern was back in march but are there other levels that kind of come into play well utilize what you learned here today if i take the drawing tool go to fibonacci retracement and draw from a high to a low in this case i'm going to go to this lower high because it preceded the breakout to the downside if you do it from the high no big deal it's just the ratio will be a bit different and then notice as we have this even though we have a basing pattern for tesla it still has failed to break above even that third retracement we're kind of dancing around that quarter which still points towards a weak trend if prices hold these higher lows we start seeing moving average crossovers breakouts of these fibs we may target those areas but ultimately you can see where some of the levels may be for an overall bullish reversal of the existing trend okay in fact longer term looks like tesla is kind of in a bit of a range here all right let's go ahead and loop back we'll see if you have any additional questions here hopefully you learned something new today on how possibly useful that fibonacci can be in technical analysis when it comes to not only seeing a trend that may still be intact holding levels like that 50 and that 61.8 but also when trends are down where are those levels that traders may be looking for that potential bullish reversal and so hopefully you can reflect on some of those levels as we continue into the earnings season and see if there's even an attempt to reverse this trend or we're going to continue seeing a bit of back and forth and possibly continuation the downside if earnings and certainly the guidance going into the next quarter may disappoint and i'm looking at looks like there are no additional questions there but you can go ahead and do two things for me uh one if you happen to stumble on this webcast or you've been on this webcast a few times but did not notice there's a subscribe link on the bottom of the page here if you click on that you can turn on notifications and be alerted to some of my upcoming sessions as well as some of cameron sessions as well sometimes we put a survey out here too i don't see a survey out on the chat if there was i'm sure cameron would push that through but if you enjoyed what you learned here today consider clicking like you can click like and there's also a comment below i would love to get your feedback there once again i'd like to thank for those of you that have joined us here live and those you listen to the archive session as well uh thank you for being with us here this afternoon and i would encourage you to practice what you learn here today on some of these stocks that are in your portfolio maybe play around with some of those fibonacci pattern tools and remember folks in order to demonstrate the functionality of the platform we did have to use actual symbols keeping in mind td ameritrade does not make recommendations or determine suitability of any security or strategy for individual traders any investment decision you make in your self-directed account is solely your responsibility have a great day folks appreciate your time as always and we'll talk to you again real soon bye now [Music] you
2022-07-13 19:45
