To retrace or not to retrace, that is the question…
With the market having taken us virtually straight down and straight back up over the last 3 weeks or so, much of the technical talk has centered around “retracement” - does the big move up indicate a resumption of the disrupted rally, leading back to new highs, or is it just a retracement of the big move down, destined to stall out and continue the move down?
When discussing retracements, the “Fibonacci retracement” levels always come up. As Investopedia describes them:
A term used in technical analysis that refers to the likelihood that a financial asset’s price will retrace a large portion of an original move and find support or resistance at the key Fibonacci levels before it continues in the original direction. These levels are created by drawing a trendline between two extreme points and then dividing the vertical distance by the key Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8% and 100%.
Let’s take a look at the major indices today, and see where they stand in terms of those Fibonacci retracement levels:
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The Dow and the Nasdaq are both dancing right around the .618 (61.8%) retracement levels after their big surge up on Wednesday. |
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The S&P has retraced a bit further, but it now stands just below the .786 (78.6%) retracement, which some refer to as the “Gatekeeper” level. Here’s how Dave Landry describes the “gatekeeper”:
One thing that we observed is that deep pullbacks/sharp sell offs often have one last run towards their old highs before eventually topping. Upon further observation, we noticed that markets often stall out right at their .786 retracement level (of the correction). Derrik explained to me that this retracement is the “Gatekeeper.” If it breaks through it, the market often goes to new highs and beyond. However, the real opportunity lies in the fact that markets can often form a top at these levels.
Does this mean that the market can’t move through these levels and go on to reach new highs? Of course not. I just found it somewhat interesting that all three of the major indices are sitting right near what are considered significant retracement levels, and it’s just one more thing to keep in mind as we watch how the indices behave over the next few weeks.
Charts courtesy of StockCharts.com
