Fibonacci Retracement Levels, Additional Techniques (cont.)

Refer to the 3-Min bar chart titled "Treasury Bond Rally US H0 Rally Retracement" [Thumbnail - Full Size ].

Notice the three moves down at "A," "B," and "C" and they are each composed of three pushes down. Notice also the noisy just after down move a3. Compare this with the move down from "C" to "D." Very similar; even the noisy after down move a3 is present!

As an aside, often what occurs in the shorter time frame is mirrored in the future in the longer time frame. Note the many similarities between the February 3rd, 2000 retracement into February 4th and the sell off from October 5th, 1998 into the intermediate bottom in January 2000 (reference the chart titled Daily Bond Chart SPH0) where this move up originated. The resolution of this reversal should show us where the market is headed on a much larger time frame. We explore this concept more completely in Recurrent Structures.

Everything is set up for a buy here and we enter at the market at 93^21 with a tight stop at 93^12. We are either correct and the market will move higher or price will fail here. Our stop is in the substantial consolidation zone formed February 2nd. If price can penetrate this zone to our stop, we will concede we are wrong and accept our small loss.

We are rewarded quickly by a move higher and almost as quickly disconcerted by an unexpected retracement. Confidence returns when price reverses just below the 50.0% retracement level.

We take profits on half of our position as price moves higher into 94^08, giving us a free look at a probable move higher and adding to our longs from earlier in the move. (Our target is initially 98.00 to 100.00 -- around the monthly moving average.) Our principal concern is that the move from "G" to "H" will manifest itself on the longer-term, daily charts pushing price back down to the 92.00 level, where the market would again be a buy.

Our final chart is a 15-Min bar chart with the 23.6% retracement level of the total move shown in black. The red retracement levels have been drawn from the top of the move at "E" down to the presumed retracement low at "F." (We do not know whether the move down to "F" is a retracement low until price moves higher than "E." "E" could be the market high and "F" is just a breather on the way to lower prices.

It is critical to assume a defensive posture regardless of one's confidence level. The fact that we could be wrong about price direction is the principle reason for covering half of our position. Had price moved up over a point from our entry, above the 94^28 spike bars up, we would have held all contracts overnight.

What conclusions can you draw regarding the red retracement levels from "E" to "F"?

By taking some profits at the 94^08 level, we are probably assured, unless a large overnight gap occurs, that this winning trade does not turn into a losing trade. We have the additional comfort of knowing we have a substantial position from the earlier portion of the move. The longer a move travels without a substantial retracement, the more conservative we become in taking contracts home overnight. However, if we can identify the substantial retracement when it comes, we will again become more aggressive in holding a larger percentage of a position overnight.

With Fibonacci Retracements in our trading Toolkit, identifying the substantial retracement when it comes is much easier, especially when combined with other, non-correlated tools.