Through the use of extentions studies, we will be calculating key areas of price support and resistance.

An extension is very similar to a retracement. It is „recapturing“ a percentage of the previous move (X:A illustrated above). The difference between a retracement and an extension is that an extension recaptures more than 100% of the previous X;A move-Basically, В will go beyond X. The specific ratios I use for extensions are 1.272 and 1.618. Let's assume X is $20 and A is $30 in Figure 2.1. Below is the process to determine Fibonacci extension levels.

First, let's calculate what the range of X to A is:

Price @ A: $30

Price @ X: $20

Range = $10.00

Next let's multiply this range by each Fibonacci ratio:

Ratio Points

1,272 $12.72

1.618 $16.18

Finally, take the number from each ratio and subtract it from A, which is $30.00. This will provide you with Fibonacci extension levels:

So, if I were to ask what the 1.272 extension level of swing X:A in Figure 2,1 was, you would answer 17.28. This is a support level. Now we can do the same type of analysis to determine resistance. Let's look at Figure 2.2 where X is 30 and A is 20. Instead of subtracting from A (like in Figure 2.1), we will add to A to determine resistance:

Let's look at a couple of charts with extensions at work.

The daily chart of IGT above put in a swing low point (X) at 73.21. Over the next 12 trading sessions IGT traded up to (A), which was a high of 80.10. A reversal to the downside began, so, as soon as the swing high (A) was established, we could calculate the Fibonacci extension levels that might act as support and stop the downside movement. Remember, extensions are basically retracements of greater than 100% of the X to A move. The specific ratios we use are 1.272 and 1.618. Those levels came in at:

1.272 = 71.33

1.618 = 68.95

Check this out!

IGT traded down to the 1.272 extension level of swing X:A at 71.33 and did an immediate reversal and went up over 7 points in eight trading sessions.

Here is the same stock from a different perspective. Here we look to calculate resistance extension levels based on swing X:A.

The daily chart of (IGT) above put in a swing high (X) at 78.40, Over the next 12 trading sessions (IGT) traded down to (A), which was a low of 73.21. A reversal to the upside began. So, as soon as the low (A) was established, we could calculate the Fibonacci extension levels that might act as resistance and stop the upside movement. Remember, extensions are basically retracements of greater than 100% of the X to A move. The specific ratios we use are 1.272 and 1.618. Those levels came in at:

1.272 = 79.81

1.618 = 81.60