The action over the last week has been fast and furious especially in commodities, regardless of whether you are trading iShares Silver Trust (SLV) or the actual silver futures, which sold off 33% from highs and has now rallied nearly 17% since Friday morning.
To take advantage of this action, active investors must have a plan of attack and have an idea where to buy back your position or press shorts. Many traders use moving averages and they are very important, but today we look at how Fibonacci retracement levels can be used during extreme price action or run of the mill trading.
Before we do that, lets define our use of Fibonacci retracements:
According to Investopedia, the Fibonacci retracement is created by taking two extreme points (usually a major peak and trough) on a stock chart and dividing the vertical distance by the key Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8% and 100%. Once these levels are identified, horizontal lines are drawn and used to identify possible support and resistance levels.
Now that we have a base understanding of retracement levels, let’s look at how they can help active investors. The silver etf, iShares Silver Trust (NYSE:SLV) was the most active trading instrument in the equities market because of the move in silver futures. Once silver sold-off thru $45 and began to cascade below 20-day and 50-day averages, the fear really set in for traders with the breakdown of every support level. However, a quick use of retracement levels, gave you a clue as to where support might hold up.
Traders tend to gravitate to retracement tools in the absence of other support/resistance levels, but ideally you want Fibonacci retracement to confirm other forms technical support like moving averages – we see this in Silver.
On the following chart, you can see the 50% retracement level of $33.79 in silver futures, coincides with the rising trendline going back to August 2010 and also represents the 21-week moving average (not pictured, look it up).
A quick look at the chart in Sina Corp. (NASDAQ:SINA) illustrates profit-taking in the stock over the last 2 weeks after reaching $147.12. Utilizing an hourly or 60min chart and retracement levels to play the bounce, active investors could take advantage of the relative weakness we highlighted yesterday. The 38.2% retracement level in Sina from 52-week highs is the $127.70 area. In addition, when we use the May 2nd pivot high of $139.38 to last Wednesday’s low of $115.66, the 50% retracement is a similar $127.50 area. The 21-day moving average on Sina Corp. comes in around $127.60 area, giving traders multiple technical reasons to sell the stock within the same 30cent area.
These retracement levels have already come into play, but the use of retracements as a trade tool is important to highlight since moving forward there will be T3live Watchlist posts on stocks/commodities approaching important retracement levels on daily and hourly charts.
Scott Redler is the Chief Strategic Officer of T3 Live. He develops all trading strategies for the service and acts as the face of T3 Live. Mr. Redler focuses on thorough preparation and discipline as a trader. Scott Redler has been trading equities for more than 10 years and has more recently received widespread recognition from the financial community for his insightful, pragmatic approach. He began his career as a broker and venture capitalist where he was able to facilitate relationships that led him into trading. Beginning his trading career at Broadway Trading in 1999, Scott moved on with Marc Sperling to Sperling Enterprises, LLC after establishing himself as one of the best young traders in the firm. As a manager at Sperling Enterprises, he maintained his status as a top trader in the industry while working closely with all traders in the firm to dramatically increase performance. Scott has participated in more than 30 triathlons and one IronMan triathlon, exhibiting a work ethic that also defines his trading. His vast knowledge and meticulous attention to detail has led to regular appearances on CNBC, Fox Business and Bloomberg, and he has been quoted in the Wall Street Journal and Investor’s Business Daily among other publications. Scott produces much of the media and content available to subscribers and followers. T3LIVE.com is an online financial media network and education platform that provides active traders and investors with market analysis, real-time access to strategies, and in-depth training from real traders, real-time.
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