Read along so you can use Fibonacci Retracement to spot when your favorite stock or the market is ready to turn.

What follows is a short tutorial on how you could have identified the U.S. stock market high of May 25th 2001 with fibonacci retracement levels.  (*** In case you think this is just an isolated example, visit my other trading site, www.fibonacci-retracements.com, and sign up for the free Fib Trading newsletter and I'll show you opportunities as they occur ***)

First, a little history.

If you have heard of the golden mean, or the golden ratio, then you probably already know that Fibonacci was the name of one of the greatest European mathematicians of the middle ages. 

His fame, as related to the stock market, comes from a series of numbers that he is associated with.  The series looks like this:

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, ...

This series continues on forever.  The series is formed by taking the previous number and adding it to the current number to get the next number in the series.

For instance:   3, 5, 8, 13, 21, 34, 55, 89, 144, ...

The previous  number of 13 is added to the current number of 21 to get the next number of 34.

Now here's where it gets good.

Take the current number and divide by the next number.

21/34 = 0.6176  or  34/55 = 0.6182  or  144/233 = 0.6180

0.618 is 62%, this is one of the key Fibonacci retracement levels.

You can get the 38% retracement level by taking the previous number and dividing by the next number.

21/55 = 0.382  or 34/89 = 0.382  etc.

Another way is simply to multiply 0.618 by itself.

0.618 * 0.618 = 0.382

One other number to be aware of is the square root of 0.618.

square root of 0.618 is 0.786 (or 79%).

And finally, the 50% level is a price level to be reckoned with, even if it doesn't have it's roots in the Fibonacci series.

Now, I don't claim to know why these numbers work in the stock market.  And it's not important to me.  What is important is that they do work.

Alright, enough theory, let's move on.

With these Fibonacci retracement levels in mind, let's see how to pinpoint a stock market turning point.

The chart for the first half of 2001 for the S&P 500 shows the market declining from the late January until mid March.

After the decline, a substantial rally occurs driving the market almost back to the 2001 high.

How is one to know which fibonacci retracement level to be looking at?  Will this rally stop at the 38%, 50%, 62%, or 79% fibonacci retracement level?

In early March, the market did stall out at the 62% level.  The market couldn't break above that level for almost two full weeks.  But then it did breakout above the previous high ... and did so decisively.

Here's the information you need to understand why the 78% fibonacci retracement level was the level mostly like to stop a rally dead in it's tracks.

Like a lot of decisions you make in life, the best ones are made with the best information available.  For this stock market turning point, consider the May 2001 high relative to the all time high.  In other words, consider the fibonacci retracement level in a larger time frame.

If we put up the 38%, 50%, and 62% fibonacci retracement levels from the all time high in 2000 to the March 2001 low, notice the overlap.

Keypoint:  The 50% fibonacci retracement level from the larger time frame is at the almost exact price level as the 78% fibonacci retracement level from the smaller time frame.

When fibonacci retracement levels from different time frames overlap, the odds of a stock finding support or resistance at that price level is increased.

Think of it this way, you have traders from a shorter time frame in agreement with traders from a larger time frame.  More people thinking (and voting with their money) on an outcome often leads to self-fulfilling actions.

Fibonacci retracements happen all the time.

So what?

If they happen all the time and always resulted in a reversal we would all be rich.

But that's not how it works.  You can improve your chances of success if you look for fibonacci retracement levels that overlap from multiple time frames. 

If you are interested in learning more about this way of trading, read Stephen Pierce's Fibonacci Secrets.

Keep this in mind the next time you spot your favorite stock at a fibonacci retracement level.  In the meantime, use this handy fibonacci calculator to show you the important levels to watch for.