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?
TradeStation has, for decades, advanced the trading industry, providing access to stocks, options, futures and cryptocurrencies. See our Overview for more.
Important Information
TradeStation Securities, Inc., TradeStation Crypto, Inc., and TradeStation Technologies, Inc. are each wholly owned subsidiaries of TradeStation Group, Inc., all operating, and providing products and services, under the TradeStation brand and trademark. TradeStation Crypto, Inc. offers to self-directed investors and traders cryptocurrency brokerage services. It is neither licensed with the SEC or the CFTC nor is it a Member of NFA. When applying for, or purchasing, accounts, subscriptions, products, and services, it is important that you know which company you will be dealing with. Please click here for further important information explaining what this means.
This content is for informational and educational purposes only. This is not a recommendation regarding any investment or investment strategy. Any opinions expressed herein are those of the author and do not represent the views or opinions of TradeStation or any of its affiliates.
Investing involves risks. Past performance, whether actual or indicated by historical tests of strategies, is no guarantee of future performance or success. There is a possibility that you may sustain a loss equal to or greater than your entire investment regardless of which asset class you trade (equities, options, futures, or digital assets); therefore, you should not invest or risk money that you cannot afford to lose. Before trading any asset class, first read the relevant risk disclosure statements on the Important Documents page, found here: www.tradestation.com/important-information.
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?
TradeStation has, for decades, advanced the trading industry, providing access to stocks, options, futures and cryptocurrencies. See our Overview for more.
Important Information
TradeStation Securities, Inc., TradeStation Crypto, Inc., and TradeStation Technologies, Inc. are each wholly owned subsidiaries of TradeStation Group, Inc., all operating, and providing products and services, under the TradeStation brand and trademark. TradeStation Crypto, Inc. offers to self-directed investors and traders cryptocurrency brokerage services. It is neither licensed with the SEC or the CFTC nor is it a Member of NFA. When applying for, or purchasing, accounts, subscriptions, products, and services, it is important that you know which company you will be dealing with. Please click here for further important information explaining what this means.
This content is for informational and educational purposes only. This is not a recommendation regarding any investment or investment strategy. Any opinions expressed herein are those of the author and do not represent the views or opinions of TradeStation or any of its affiliates.
Investing involves risks. Past performance, whether actual or indicated by historical tests of strategies, is no guarantee of future performance or success. There is a possibility that you may sustain a loss equal to or greater than your entire investment regardless of which asset class you trade (equities, options, futures, or digital assets); therefore, you should not invest or risk money that you cannot afford to lose. Before trading any asset class, first read the relevant risk disclosure statements on the Important Documents page, found here: www.tradestation.com/important-information.
