How To Time Individual Stocks Using Fibonacci Price Analysis

A question I am often asked is whether or not my "Fibonacci work" is valid or valuable when applied to individual stocks. The answer to this question is YES, as long as there is adequate data with well-defined swing points. Since it is difficult to explain what "well-defined swing points" are, let me just say that most stocks can be analyzed with this method. The exceptions would be those stocks that have just been "born" and have little back data, or bulletin board stocks which are erratic.

Let's take a look at a few examples of Fibonacci price clusters at work in a few well-known stocks starting with Microsoft (MSFT | Quote | Chart | News | PowerRating). I apply the same principles I use for analyzing stock indexes and commodities when I am looking at an individual stock. I look at trend, pattern, price and time. For this article, my focus is on PRICE. In the MSFT chart below, I saw a pattern of higher highs and lows (in other words the immediate trend was up). I started setting up my Fibonacci price relationships for a potential entry in the direction of the trend in this stock. Two zones stood out immediately as I did this work, as they centered around the 100% price projections of the prior corrective declines. These zones came in at 57.98-58.60 and at 57.06-46. Note that a low was made directly within the first price cluster zone at the 58.10 level.

Next, let's take a look at a daily chart of AOL Time Warner (AOL | Quote | Chart | News | PowerRating). One of my favorite reversal patterns that often shows up in stock index futures and other commodities showed up in this stock. Here, we saw a "two-step" correction, which is sometimes called a "Gartley" pattern, into the coincidence of four key Fibonacci price relationships. The price cluster came in between 29.12-29.59. The actual low in this case was made at 29.39. Now how would you have traded against this "cluster zone"? Let's move on to the next chart, and I will give you some ideas.

Once you knew you were moving into a key support decision in this stock, you could go down to an intraday chart (five-minute in this example) and look for an entry "trigger." After this stock started trading up from the 29.39 low, which turned into support, you could have used the prior swing high on the five-minute chart seen below as your "trigger" for an entry on the buy side.

What about the daytraders that like to short stocks? For those, I have a nice example in Nokia (NOK | Quote | Chart | News | PowerRating). On Sept. 25 I saw this stock test and stall against a "triple price cluster" of resistance at the 17.49-66 area. After this stall, you would want to look to your short-term charts for indications of a reversal against this resistance.

If you went down to a five-minute chart on this stock, your first violation of a prior swing low that would have suggested a short sale came in with a break of the 17.17 swing low. A healthy decline followed this "trigger." Your initial risk would have been defined above the high made into the cluster at 17.49. Although the "price cluster high" was retested after this break, the key high (where your stop would have been placed above) was never violated.

***Update to AOL setup: After this article was originally written, I went back and checked the AOL chart. So far we have seen a rally to 39.21 from the 29.39 price cluster low!

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