Active-Trader - The 1.272 and the 1.618

Welcome Back,  Active Traders and Wealth Builders.

This past week we finally got the nasty correction in the stock market that I predicted back on my poetic post Evidence of Autumn back on August 11, 2013.

This is not much of a stretch of course, given all the evidence.  Its amazing since one would think the odds of a market sell-off would be distributed evenly throughout the days and months of the year.  But its not the case since, for whatever reason, the stock market always finds a reason to sell off hard in the month of October.

One thing I have learned from the my time in the Simpler Options trading room is the importance of Fibonacci time and price relationships.  The chart in the upper left shows a chart of Facebook made with TOS using the Fibonacci Price Retracement tool.   The chart shows the high at $51.60 and the subsequent low formed 8 days later at about $45.40.   A few points to consider:

• The entire move from top to bottom constitutes 100% of the original pullback
• The green lines represent 50% and 61.8% of the original move which is a normal retracement of a move in the primary direction.  I bought FB near the high of the low bar and expected a move back to 61.8% of the move to take profits.  I took profits too early, but that's the subject of a different blog post.
• The Cyan (light blue) lines represent 78.6 and  100% of the original move
• The purple lines represent 127.5% and 161.8% of the pullback and represent targets or points of future resistance should the price break the old high to the upside.

Like support and resistance, Fibonacci levels represent likely levels of resistance after a move occurs. They are not hard and fast levels, rather price points to be aware of after well defined moves from top to bottom.

So put on your Fib glasses people and be aware of these price relationships on daily and larger levels since they let you know when to take profits.

That's all, have a great week ahead.