What Fibonacci Retracement Levels Say About the DJIA
When it comes to technical analysis, it’s all about confirmation of support and resistance.
If we fail to identify either, we take on far too much risk. We may buy – or even sell at the wrong time. And as many of us know, it can be costly – and frustrating.
So, the more you know, the better off you are.
One way to identify key lines of the two is by paying attention to Fibonacci Retracement levels.
Retracement levels are based on the belief that stocks, currencies and indices tend to retrace their paths after a big move in a single direction. You first find your two extremes – a peak and a trough – and divide by key Fibonacci ratios, such as 23.6%, 38.2%, 50%, 61.8%, and 76.4%.
All are used to forecast the technical potential pullbacks or moves higher.
Once those levels are clearly identified, we then draw our horizontal lines at each % marker to define points of support and resistance. For reasons that are still not clear to all traders, these ratios play a big role in the market to determine critical points.
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Look at the Dow Jones Industrials (DJIA), for example.
After drawing our lines, we can see that Fibonacci Retracement Levels pinpoint key levels of support and resistance to watch. For example, between November 2018 and December 2018, the 61.8% line served as support.
We can also see that in late January 2019, that same 61.8% line is resistance.
In addition, we can see that in late December 2019, the 38.2% retracement line served as resistance, as well. In fact, the DJIA did pull back from that point temporarily.
In short, this is a technical indicator that may serve you well.
Of course, you never just want to rely on Fibonacci Retracement Levels.
Relying on just one indicator without confirmation can also be costly and frustrating, too. Personally, not only will I watch key lines of support and resistance, but I’ll confirm with other indicators such as Williams’ %R (W%R), MACD, relative strength (RSI), and Bollinger Bands.
At the end of the day, you have to ask yourself this key question:
If I can’t be bothered to study a chart, should I really be buying?
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