As we all wait to see what shoe drops next on the Brexit front and the headlines from many high street retailers continue to deteriorate, I just want to share something positive with you today. This is something you can use, or more rather, at least be mindful of, if you are managing your own money and have an interest in markets across all asset classes.
Prices in financial market instruments move in waves, these waves are sometimes hard to spot, but identifying where the price of a currency, an index, a stock or a bond might change in direction, is what the game is all about. These waves can take place on multiple time frames and if identified correctly can make you money, or at the very least, perhaps enhance your investment outcomes.
So, today all I want to do is to show you two very simple examples of where using the adoption of something known asa ‘Fibonacci retracement’ study can help identify where prices might shift from one wave to the next.
The first one is on a short term time frame and the second on amuch longer term, but both are currently highly relevant and topical to the immediate markets. In both cases the maths is the same as is the potential direction information that it is sending out.
OK, so let’s look at a short term price move which has unfolded most recently in the FTSE. On the chart you are about to see, I have drawn on the price grid which shows where the move started – at 7146- that’s 100% and then where the price subsequently traded down to that’s at 6673- 0%. Ok so got that?
That was quite a steep move lower and as I am sure you all know; it has only happened the other week. So, the questionfor many traders and investors now is- 1) is this the start of a wider downside move or 2) if it is, then where do I get in on the action if I missed the first move down?
So, traders will now look to those key retracement levels of that first move to plot points at which they might subsequentlylook to sell stock again. In this case that has surely meant the 50% retracement level has proven to be the one of choice. As you can see that blue line comes in around 6909 and the price reached that perfectly last week before coming back down again so far this week.
Now, a second example of exactly this same study, on a much longer timeframe, applies to the dollar this year. If you look at the chart below you can see how the price of the USD index absolutely nailed a 50% price retracement of its previous price extension to the pip and I mean, to the pip!
That’s even more impressive in terms of providing you with the necessary evidence to prove just how important this is. So, please consider that we are talking about a price move that has been unfolding over a multiyear timeframe and then subsequently stops in its tracks to the pip. In this case that time frame is well over a decade from the start of the original upside price extension.
So, you see it certainly is important to identify these levels, even if they don’t prove to be the correct one for a particularmove. At least, if nothing else it can also be a point of reference for exiting or taking subsequent evasive action, if such action is then needed.
Naturally, just because both of these examples were of price correction that held at 50%, that’s not to underscore the importance 38.2% and 61.8%, which are equally important retracement targets too- more on all this another time, but meantime I hope you found this illuminating if nothing else.
As you will see from data calendar below there’s quite a fewimportant economic events upcoming this week. The highlights of course are the US and UK policy decisions.
I will be back to you again on Friday once we have seen the dust on both of those settle, but of course the odds on the Fedtightening are still very much shorter than they are on the Old Lady doing the same!
Key economic releases due this week
19/12- 9.30am UK November reading of CPI, RPI and PPI inflation
19/12- 1.30pm Canadian November CPI inflation reading
19/12- 7.00pm US FOMC policy decision- expected outcome is for
for 0.25% increase in Fed funds rate
19/12- 9.45pm New Zealand Q3 GDP estimate update
20/12- 12.30am Australian November unemployment report
20/12- 9.30am UK November Retail sales
20/12- 12.00pm Bank of England policy decision – expected no change in
current 0.75% base rate
21/12- 1.30pm Canadian October GDP estimate
21/12- 1.30pm US final reading of Q3 GDP and core GDP price index and PCE
21/12- 3.00pm US December reading of Personal income and spending