Let’s say I’m looking at the daily candlestick chart of Apple (AAPL). The IF/THEN of chart analysis goes something like this: IF the prior candle is bullish THEN price should find support at or above the Fib support zone of that prior candle. IF price opens the following day below the Fib support zone THEN that prior candle wasn’t bullish. Simple, yes?
Below is the daily chart of AAPL through the close on Thursday, Nov14. Clearly that’s a bullish candle! A large green candle that closed near the high of the day and closed well above the 8-day SMA upper band which was turning up. Doesn’t get much more bullish looking than that!
Still, I better apply the IF/THEN rule to that candle. I overlay both the 50%-61.8% Fib retracement support zone (measured from the bottom of the candle to the top) and the 50%-61.8% Fib retracement resistance zone (measured from the top of the candle to the bottom). So, when trading opens on the following day, 226.48-226.94 is bullish support and 226.94-227.39 is bearish resistance. Since 226.94 is the 50% retracement (HB or Half-Back), I consider that fair value for that day.
The next day AAPL opened at 226.40 which is not only below fair value from the prior day’s candle but is also below the 61.8% bullish Fib support level. So, does that mean the prior day’s candle wasn’t bullish after all? Current price action determines whether or not prior past price action was bullish, bearish, or neither. With that opening surprise I could go from expecting to get long in the bullish Fib support zone to taking a bearish trade in the Fib resistance zone. As you can see below, taking a bearish trade at HB (with a stop on acceptance above the 61.8% Fib resistance level) would’ve been a great trade…almost. Actually AAPL reversed $.02 below HB and then moved lower. That’s why I don’t rest orders exactly at Fib levels! If I wanted to short AAPL at Fib resistance then I would’ve placed my order just below the resistance zone. Resting an order at exactly HB would’ve missed that fill by $.02.
So now what? I apply the same IF/THEN analysis to Friday’s candle plus I’m going to add-in the prior ranges instead of just examining a single candle. What a coincidence, Friday’s decline in price reversed within $.03 of 2 important Fib support levels based on the 2 prior rallies. Based on that price action, and the fact that the 8 SMA bands are rising, the chart still looks bullish.
Now let’s apply the IF/THEN to Friday’s candle. IF sellers are in control then I’d expect 225.60-225.91 to be strong resistance. IF price can find acceptance above that zone THEN it would appear that sellers are not in control.
Because the 8 SMA bands are rising and price is above the rising lower band and price is above Fib support of the prior 2 rallies, then the expectation is that buyers are in control. However, price needs back above 225.91 to confirm that.
So there you have another example of understanding what the price action is indicating by applying the IF/THEN rule. Leave any questions or comments down below.