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12

Bullish .618 Retracement

The bullish .618 is an important retracement area for a stock that is selling off When I see a sharp sell-off in a stock that has completed a nice rally, the .618 retracement is the first area that I examine for a potential reversal.

bullish .618 retracement buy at b!

During a decline, I will wait for the stock to approach the .618 area and observe the price action. If the sell-off is extreme, as indicated by a waming sign, I will wait one price bar before executing a trade at the .618 retracement area. However, if a stock finds support in this area, exhibited by a reversal price bar, I will buy at the .618

It does take some time to be able to decipher the price action accurately at the Fibonacci numbers. However, if you study the major declines like the following examples, you will leam how the market provides clues regarding the nature of the price action.



The first chart illustrates a bullish .618 retracement nicely. Amazon.com is an excellent example of an incredibly volatile stock that possessed very harmonic price action.

AMAZON.COM (AMZN): DAILY

BULLISH .618 RETRACEMENT

©BlgChaits.coni

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120 0 80

It is amazing that this stock rallied over 800% in less than five months and retraced almost exactly to the .618 ofthis move. In fact, after selling off more than 60 points, AMZN reversed on the same day it hit the .618.

I want to take a moment and explain the means of calculating the Fibonacci retracement. The September low at 10 13/16 (Pt. X) was subtracted fi-om the January 1999 high at 99 9/16 (Pt. A). The difference between the high and the low was 88 3/4 (99.5625-10.8125-88.75). I multiplied 88.75 by 0.618, which was equivalent to 54.8475. I subtracted this amount, approximated at 54 27/32, from the stocks high at 99 9/16 (99.5625-54.8475=44.6785). This calculation approximates to 44 11/16.

80999999999990425



The stock bottomed at 42 1/8 (Pt. B) and rallied sharply. Although the stock possessed a bearish price bar on the day it hit the .618 retracement, the next day clearly exhibited a reversal price bar, as the stock gapped up on the open and closed above the previous days high. In fact, Amazon.com rallied up seven days in a row vwthout breaking the previous days low. Such price action is very significant after reversing off a Fibonacci retracement. Furthermore, this chart reveals an ideal reversal, as the stock bounced on the day it hit the .618 and exhibited a bullish continuation of higher highs, lows and closes.

The following enlarged chart shows the price action ofAmazon.com at the .618 retracement. It is important to notice how the stock began a new uptrend after hitting the retracement.

AMAZON.COM (AMZN): DAILY

PRICE ACTION®.618 ItETRACEMENT

.618 @ 44 11/16

Vol urns

©BigCharts.com

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25 26 27 28 2? F?b 2 3 4 5 8 9 10 U 12 16 17 18 19 22 23 24 25 26 Mai- 2 3 4 5 8 $

70 63 66 64 52 60 58 S6 54 52 50 48 4S 44 42

50 40 30 20 10 0

In such an extreme sell-off like this one, it is prudent to wait one price bar to confirm the reversal. In this case, Amazon sold off over 50 points in a very short time. So, I believe these circumstances require some additional caution. But, the reversal at the .618 retracement indicated an excellent area to buy the stock.



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