Are Retracements Stair-Stepping Toward a Breakout?

2023年1月23日

The S&P 500 has frustrated traders for months as a tightening range punishes both bulls and bears.

Picking levels in a market like this can be a huge challenge because prices keep revisiting the same spots as they narrow. It’s a bit like trench warfare, with armies battling futilely for weeks over a few yards of territory.

But one basic technique has provided some clarity to help navigate the back-and-forth: Fibonacci retracements.

Notice how SPX surged from below 3500 on October 13 toward 4100 by early December. The rally stalled around the 200-day simple moving average (SMA). Sellers quickly returned, and for a while it looked the bears were in control again.

But then the index held 3800: a low from May 2022 and a “nice round number.” The level had other relevance because it represented almost exactly a 50 percent retracement of the preceding rally. (See the yellow markings.)

SPX sat for the next two weeks before returning to the 200-day SMA. The bears tried another attack, but couldn’t get prices to close under 3890.

This matched the December 21 high, but it was yet another 50 percent retracement. (Marked in white.)

Here are two potential lessons for traders:

First, retracements of current moves can be a simple way to find levels and manage risk. This is especially true when many price points and indicators compete for your attention.

Second, this kind of Fibonacci analysis may suggest the bulls are taking charge. After all, if prices rallied, retraced and continued higher two times in a row, it could be trying to tell us that a new uptrend is taking shape. Are we stair-stepping toward a breakout?

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