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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