Fibonacci Retracement Levels, Additional Techniques

Here are other ways I use Fibonacci retracement levels. This should add to and clarify the previous information about using Fibonacci retracement levels. (See previous lesson - Fibonacci Retracement Levels - Mentor Update.)

A daily chart of the Treasury Bond market is included as an overview since this is the market under review and is titled "Treasury Bond Rally USH0 Overview." [Thumbnail - Full Size ]

Refer to the 3-minute bar chart titled "Treasury Bond Early Rally and Fibonacci Retracements". [Thumbnail - Full Size ]

We have drawn the initial, "deeper" Fibonacci level from the recent intermediate low of January 18th, 2000 to the first high defined by a substantial retracement on the short term intraday charts. The first retracement of note was the selloff from the January 27th high of a little over 1.00 points, making the 27th the high end point of the Fibonacci Retracement Tool and labeled "A" on the chart.

Note that this retracement was the first such deeper 38.2% retracement percentage at level "B" since the January 24th breakout marked "C". There is also an alternate breakout labeled "Alt C".

There were previous minor reactions of around 23.6% from minor highs at:

1/25 at 1:11 Central labeled 1
1/26 at 11:59 Central labeled 2 and
1/27 at 8:23 Central labeled 3

after the January 24th breakout.

As an exercise, use the Fibonacci Retracement Tool, putting the beginning endpoint at the January 18th low and slowly moving the retracement tool higher, noticing the retracement levels after the January 24th breakout.

Important point: In the early stages of an important breakout, in most markets, the early 23.6% retracements can be bought with a tight stop just below the 38.2% retracement level, making for a very low risk, high opportunity trade. It is critical to wait until after the breakout and the first 23.6% retracement to verify the market will adhere to this regimen.

Sometimes the first retracement will be to the 38.2% level rather than the 23.6% level, in which case a stop should be placed at the 50% level. Some markets will retrace almost 100%. These markets should be avoided unless there are other compelling reasons for the trade. In these cases, it is best to wait for another deep retracement and place a trailing buy above the noise of the move down (for long positions) with a protective stop below the previous deep retracement.

Look at other market breakouts in different time frames using these approaches. Notice the optimal entry points and secure stop placement levels. Notice failures of this approach. What clues, if any, were present of an impending failure?