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Using Fibonacci retracements – A practical example using the FTSE Chart

We are often asked how we use Fibonacci retracements, and what time frames they are best used on.

Let’s look at the FTSE Futures chart right now to try and give a flavour of how they can help us.

Since last Tuesday (as we suspected, and as was flagged to our clients) we have seen a recovery rally in the FTSE from the lows just above 3450 set at the start of March.

There have been many commentators who are calling this a “bear market rally”, and are waiting for the first signs of weakness to pounce upon and use as a selling opportunity. As our customers know we’re not quite in this camp, but there you go. We have an article recently written in our members area that expands on our thoughts as to whether this is a market bottom or not.

Anyway, back to our magic Fibonacci numbers.

The Fibonacci retracements commonly watched are 38.2% and 61.8%. If a market has been selling off then we always call off the hounds on the down-leg if we can retake the 38.2% level, at which point we target a move to the 61.8% level. In this instance, as the market started rallying off the lows we looked up to see where the market would have taken back 38.2% of the weakness seen since the start of the year (see chart 1). This level was 3904. We got to here this morning… and promptly fell over.

Chart 1: FTSE Futures Daily Candlestick chart since the start of 2009

So does that mean we’re right back in bed with the bears and looking for a fresh test of the lows? It could well be, but the slightly more cautious can use Fibonacci levels on a shorter term chart to help them with that one as well, because it could be argued that unless we give back 38.2% of the recovery, then maybe the recovery is still going on!

So we start at the low and measure up to the high and find the 38.2% retrace of that move. This is 3738 (and coincides with Friday’s low) so we are using this level as a reference now to see what the market wants to do next. A break below here and sure, the bears are back in charge, and we’ll look to head back down, targeting 3625 (the short term 61.8% retracement) first, then 3443 (the year’s lows), as per the second chart, below.

Chart 2: FTSE Futures, Hourly Candlestick Chart, 9th – 18th March

So you can see we use Fibonacci levels on lots of different time-scales, and they can all have a use in telling us where we are, and what the market’s thinking.

Be safe,

Cheers,

Clive.