Sometimes things aren’t what they seem to be. That’s especially true when looking at charts! You need a method for identifying where buyers and sellers reveal their true intentions. Fibonacci levels can provide the framework for that method!
Below is a Tesla (TSLA) weekly candlestick chart from the past. At the time of the most current candle shown, was it bullish or bearish? That’s seems pretty easy, doesn’t it? It’s clearly bullish! Gap up from prior week, close near the high of the week, definitely bullish! Of course it could be a bullish exhaustion candle but there’s nothing to indicate that on this chart so I’ve decided it to be 100% bullish. Final answer! What about this idea? Instead of declaring it to be bullish, since the market doesn’t care what I think, how about I let the market participants decide?
First step to letting the market decide whether a candle is bullish or bearish is identifying and labeling the candle in question with a Fibonacci support and resistance zone. Why both of those if that candle was clearly bullish? Once again, the market doesn’t care what I, or you, think. So I draw a 61.8% retracement line from the top of the candle to the bottom for resistance and a 61.8% retracement line from the bottom of the candle to the top for support. I also label the 50% Fib (also know as Half-Back or HB) as fair value. That’s where the average buyer and seller for that week ‘reside’. Now that I have the candle labeled we’ll advance 1 week.
Below is 1 week after the “clearly bullish” candle. The 61.8% retracement resistance level was 398.60 and the high of that week was 399. I refer to that as close enough! IF I had a short-trade staged and ready to go at 398.60 with a stop at 414.51 (.01 above the high of the candle that we’ve been focusing on) I would’ve had about 16 points of risk and my drawdown would’ve been .4 points. The gain at the low of the week would’ve been 70 points. If I had rested a long trade at 388.78 Fib support with a stop below the prior candle’s low I would’ve had 15.90 drawdown after being stopped out. How to trade these entry points isn’t part of this post but, for example, buying a long duration (this is a weekly chart so directional moves based on this timeframe can take months) 30 Delta Put at Fib resistance and a 30 Delta Call at support would’ve ended the week still long the Put and stopped out of the Call. The other trade could’ve involved buying Puts at 398.60 and selling further OTM (out of the money) Puts at 388.78 to reduce or even eliminate the initial risk of the trade. That would be legging into a Put Vertical spread.
Below fast forward’s to 2 week’s later where price is once again rejected near Fib resistance.
And below is still one more test of Fib resistance 9 weeks after the initial candle discussed in this analysis.
Below is many weeks later where price continued to move lower.
Following a 75% loss in value price almost reached 100. I have little doubt that some ‘experts’ were calling for lower prices still but selling/shorting there is what is referred to as shorting in the hole and it’s generally a very bad idea! All you have to do is look at the chart below to see why. Anybody who shorted near 100 had to endure a strong rally all the way back up to 299. Where could I have shorted if I wanted to? Patience would’ve been required to wait for a rally back up to the Fib retracement resistance zone of the decline from 414 to 101. The 61.8% Fib retracement of that decline was 295.05 and after an overthrow of 4 points price reversed sharply and closed that week at 255.
It seems a waste for a trader to just sit and wait for price to rally all the way back up into resistance to short again. Couldn’t I have traded that rally? It still would’ve required patience (most good trades do) but after price put in the first wave up in the rally I would’ve been watching for a retracement lower into the Fib support zone of that rally. See the chart below.
Now is a good time to introduce Fibonacci extensions because algorithmic traders (algos) also utilize those levels. After that first wave higher following the 101 low price pulled-back to the Fib support zone of that rally and started higher again. At that point I have a wave 1 up and a wave 2 down so I can plot out a target for the 3rd wave up! The chart below labels the beginning stage of that 3rd wave rally.
Below is the full Fib extension shown. The 123.6% Fib extension was resting at 295 and price topped within 4 points of that at 299. Hmmm, those numbers seem familiar! 295 was also the 61.8% Fib retracement of the decline from 414 to 101. That made a confluence of 2 important Fibs at the same price! What a great setup for a short trade!
Below I can set a target for another short trade. Price is currently finding support at the 100% Fib extension so IF seller’s are motivated then price is likely headed for the 123.6% Fib extension near 135 however I need to have a stop level for my trades so what would I use for a trade trigger and stop at this point? One more chart to go!
The current weekly candle reversed near the previous week’s Fib resistance zone so price acceptance above that 176.49-178.32 zone or price moving .01 above the high at 184.25 can be used as a stop on a short trade however a short trade should’ve already been initiated in that Fib resistance zone so at today’s closing price of 164.90 I won’t be making that trade.
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