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Predicting the point at which an index switches directions is an inexact science – unless you’ve got math on your side.
And in this instance, thanks to our friend Leonardo de Pisa – creator of the Fibonacci sequence – we’re potentially zeroing in on some pretty substantial information.
On the markets, traders use Fibonaccis – also called Fibos – to determine points of support and resistance on an index.
Look, it’s no secret that most people don’t love math.
I get that, it’s not exactly sexy. But, that’s one of the reasons you have me in your back pocket as your handy, technical-trading pal.
Take a look at this chart…
These are the Fibos of the Invesco QQQ Trust Series 1 (QQQ) – from the pandemic bottoms to the top that we saw in November 2021.
Math to some, art to others, when applied to trading, Fibos carry big implications by more or less setting the price at which buyers or sellers start to act.
Take note of $287.56 – that’s your magic mark for your 50% retracement. It’s the halfway point between those aforementioned highs and lows and is reflected on the above chart as the horizontal purple line.
These retracements are particularly important because a lot of traders are waiting for its signal to move.
So, we’re eagerly waiting for QQQ to break above that 50% mark – let’s round up and call it the $288 mark.
That is the big test – the final exam if you will. You know my rules: one time above that retracement point is an event, two times makes a break, and three is a trend. If we don’t close above the 50% Fibonacci retracement level, you’re going back to the bottom.
If it does close above 50% and continues the larger trend, we are in for one hell of a rally. There has never been a bear-market rally that closed above the 50% Fibonacci that subsequently went on to make new lows.
Now, as of Friday, we did close above the 50% retracement. So, if we see that three times, we should expect the market to continue its run higher. If we dip back down, then we are sliding deeper into the acceptance phase.
It’s exciting. It’s even a little nerve-wracking, especially considering the QQQ is currently trading extremely close to that 50% mark.
This is just another piece of evidence, on top of the 50-day moving average (50MA), the open-interest configuration, regression channels, and a host of other things, that this market is seriously congested in this tight trend.
That takes care of the math, but there’s a psychological component to this congestion, too.
Almost all of the money is sitting on the sidelines. The only dollars moving are going from one index to another – e.g., energy to tech and back to energy.
What we’re keeping our eyes out for most is the thing that’s …
About the Author
Chris Johnson is a highly regarded equity and options analyst who has spent much of his nearly 30-year market career designing and interpreting complex models to help investment firms transform millions of data points into impressive gains for clients.
At heart Chris is a quant – like the “rocket scientists” of investing – with a specialty in applying advanced mathematics like stochastic calculus, linear algebra, differential equations, and statistics to Wall Street’s data-rich environment.
He began building his proprietary models in 1998, analyzing about 2,000 records per day. Today, that database, which Chris designed and coded from scratch, analyzes a staggering 700,000 records per day. It’s the secret behind his track record.
Chris holds degrees in finance, statistics, and accounting. He worked as a licensed broker for 11 years before taking on the role of Director of Quantitative Analysis at a big-name equity and options research firm for eight years. He recently served as Director of Research of a Cleveland-based investment firm responsible for hundreds of millions in AUM. He is also the Founder/CIO of ETF Advisory Research Partners since 2007, noted for its groundbreaking work in Behavioral Valuation systems. Their research is widely read by leaders in the RIA business.
Chris is ranked in the top 99.3% of financial bloggers and top 98.6% of overall experts by TipRanks, the track record registry of financial analysts dating back to January 2009.
He is a frequent commentator on financial markets for CNBC, Fox, Bloomberg TV, and CBS Radio and has been featured in Barron’s, USA Today, Newsweek, and The Wall Street Journal, and numerous books.
Today, Chris is the editor of Night Trader and Penny Hawk. He also contributes to Money Morning as the Quant Analysis Specialist.
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