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

First let's take a look at a picture of a retracement:

A retracement is simply a move in the opposite direction of the current trend. In a sense it is „recapturing“ a portion of the move that was just made. In the illustrations above,, the current trend is defined as X:A. When price reverses direction from A to B, it is „retracing“ or recapturing a portion of the move from X to A. The Fibonacci ratios I use to calculate retracement levels are:

382, .50, .618, and .786

Retracements can be used to calculate support or resistance. When the move from X to A is up and price starts to go down (as in Figure 1.1), retracements are used to calculate support for B.

Let's say X is $10 and A is $30.

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

Price @ A: $30

Price @ X: $10

Range = $20.00

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

Ratio Points

0.382 $ 7.64

0.500 $ 10.00

0.618 $ 12.36

0.786 $ 15.72

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

So, if I were to ask you for the .618 retracement of swing X:A, the answer would be $17.64. The price levels in the table above represent Fibonacci price support decisions. The exact same analysis can be done for Figure 1–2 to calculate retracement levels acting as resistance. In Figure 1.2, X is 30 and A is 10. This time, instead of subtracting from A, we would add to A to determine price resistance levels:

Any time a stock is in a downtrend and has just completed a significant low point, we can calculate Fibonacci retracement levels. Again, the goal is to determine how much the stock will „recapture“ of the recent move down and where it has a likelihood to reverse and go back down.