Active-Trader - Fiblines in Facebook

Welcome back Active Traders and Wealth Builders.

A few weeks back my friend Franklin from Simpler Options left a comment asking for more examples of how to calculate the Fib lines.  Let's walk through an example using one of my favorites, Facebook.

1) Start with a chart of the weekly or longer time-frame

2) Identify the lowest low just prior to the beginning of a bullish advance.  Note the point at which that advance stops and pulls back.  The pullback must retrace some portion of the bullish formation, but clearly not all of it.

3) Now grab the Fibbonacci Retracements tool and drag from the top of the real body of the highest candle at the top of wave 1 and drag down to the low of the real body of the candle at the bottom of wave 1 and let go.  You will get something like what appears above.

Selection of the top and bottom of wave 1 of the Elliot Wave pattern is the most important part of the process, and its the only part that requires human judgement.  If you get that part wrong, the results will be suspect.  But along the way, you might find certain clues in the price action that show the original observation was correct.

Next bring up the properties of the drawing you just made and set the lines as shown on the right.  These are the most important lines in the sequence and represent 0, 100, 161.8, 2.618 and 4.236 multiples of the initial move.  These values are ripples or harmonic wave patterns in the price action that are all based on multiples of that initial move.

Once you have constructed the red lines are  you are left with a chart with 5 unevenly spaced areas between the red lines. The next step is to simply use the Fibonacci retracement tool to sub-divide each of the remaining sections at the 0.382 and 0.618 lines and color those green.  Those are the tree-lines and represent the 2nd most important areas of support and resistance after the fire lines.

The next step is to further sub-divide each of the remaining sections at the same multiple with white lines.  Those are the white lines and less significant that the tree lines and fire lines.

Bringing Facebook up to date, let's take a look at this weekly chart.  We can see we made a new high at 72.59 about 6 weeks back. Since then we have traded down but found support at the 2.618 fire line and bounced.  This fire line is a well-established point of support and resistance since it was resistance on the way up (not shown) and has been support since. Also, note the 6 weeks down is a move symmetrical in duration to the prior advance which lasted 6 weekly bars.

Bottom line I'm long some Facebook shares here into this weeks coming earnings report. I don't expect we are going to see a new all time high in the shares this time. Instead, I expect we are going to trade up as high as the upper tree lines (or perhaps a big higher) than roll over and head back down and end the week having taken a wild ride, but not much changed.  We'll see.

Happy Spring and enjoy your weekend and the week ahead.