Candlesticks, Fibonacci, and Chart Pattern Trading Tools : a synergistic Strategy to Enhance Profits and Reduce Risk

Figure 6.15
S&P 500 chart from 07–01 to 11–02. Extension levels.
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190
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CANDLESTICKS, CHART PATTERNS, AND FIBONACCI TOOLS
The swing from the valley at point B to the peak at point C is a
corrective move to the strong downtrend starting in March 2002. We
can draw three Fibonacci corrections at levels of 38.2 percent, 50.0 per-
cent, and 61.8 percent on the chart of the S&P 500 Index, again be-
tween July 2001 and November 2002. The initial price swing this time
runs from the peak in A to the valley in B (see Figure 6.16).
The reason we conduct the analysis is to get to areas of support
and resistance that are projections from today into the future.
Our f inal step is to bring Fibonacci extensions and Fibonacci
price corrections together in one chart, thereby def ining price bands
that are areas of potential major trend reversals.
The chart combining the different price targets of the S&P 500
Index was completed late in November 2002, shortly before we f inished
the f irst draft of this book. We did not, of course, know what the mar-
ket price would do. However, we knew that the extension levels pre-
sented here would be important.
Figure 6.16
S&P 500 chart from 05–02 to 11–02. Correction levels.
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FIBONACCI PRICE EXTENSIONS
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We could not know whether and when the price targets would be
reached, but if the market price in the S&P 500 Index were to go to
any of these price bands, it would f ind resistance. How much resis-
tance? We did not know that, either, but readers who have worked their
way through this book up to this point know the tools and how to han-
dle them properly for a solid market analysis.
Figure 6.17 shows the three resistance areas in the S&P 500 Index
derived from the combination of Fibonacci extensions and corrections.
The three resistance areas can be analyzed as follows:
1. The f irst resistance area is between 963.00 and 974.00 points.
The calculation is based on the correction level of 50.0 percent
measured from the initial swing from the peak at point A to the
valley at point B, and on the Fibonacci price extension calculated
at a ratio 0.382 on the swing size from point D to point E.