Fibonacci extensions are one of the most useful measured levels in trading. Real quick, here is how Investorpedia defines them, which is decent:
These extensions involve all levels drawn past the basic 100% level; they are frequently used by traders to determine areas that will bring in profits. One popular extension, the 161.8% level, is used to set a price target on a breakout of an ascending triangle; this target is calculated by multiplying the vertical distance of the triangle by key Fibonacci ratio 61.8%, and then adding the result to the triangle’s upper resistance level.
Forget all that ascending triangle talk, that’s technical analysis guff. A Fib extension shapes the narrative of a breakout. Right now, in the NASDAQ, we have no market profile levels, the most logical trading levels in the world, to work with. All we have are measured moves.
The Fib extensions in play right now are measured using the selling that occurred last week. Below on the NASDAQ, you can see the measurement from peak-to-trough, and the subsiquent Fib-extension above current prices. See below:
We moved up into these levels overnight. Algorithms love to probe Fib extensions, looking to run stops. Like if anyone initiated shorts into the down move, or somewhere during the retracement of it, then robots press into the move to see if these sellers really mean business, or if they’re going to stop out.
So our primary expectation on the first touch of the fib levels is for them to behave as resistance (in this case, since we reversed and extended a down move, the opposite ‘behave as support’ if we flipped the idea over). If instead we trade through the levels, and sustain price above them, it tells us this is much more than a stop run.
It could be the start of something much bigger.
And now you know everything you need to about Fibonacci extensions.
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