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business newsMajor Indexes Encountering Major Resistance
By
David Waggoner
May 19, 2011 9:15 am
The S&P 500, the Dow Industrials, and the Nasdaq 100 are all bumping up against strong resistance in the form of key Fibonacci ratios.
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The S&P 500, the Dow Industrials, and the Nasdaq 100 are all bumping up against strong resistance in the form of key Fibonacci ratios.
Fibonacci extension ratios on a vertical price axis typically encounter reactions at .382, .618, 1.00, 1.618 and 2.618. Fibonacci retrace levels usually elicit reactions at .382, .500, .618 and .786. Where these ratios occur in the overall price pattern is what determines their relevance.
In this weekly chart of the S&P 500 the green zigzag-shaped arrow outlines the .618 Fibonacci price extension from the Flash Crash pivot low (1014) up to the level of the recent price high at 1360/70. This is the zag half of the zig that originated at the 2009 low and extended to the April, 2010 high just prior to the flash crash.
Click to enlarge
I also use the Fibonacci circle in this chart. The Fibonacci circle in this case captures the spiral effect and symmetry of price for both the rise off the low from 2009 and the decline down from 2007. I use the Fibonacci circle in conjunction with a regression trend channel to identify Fibonacci pivots in both price and time directly along the axis of the trend. For example, while the green arrow shows that price has reached a .618 extension on the vertical price axis, it has not done so in the direction of trend (outer band of circle).
This weekly chart of the S&P 500 is a treasure trove of reactions to Fibonacci pivot levels along the vertical axis and along the axis of the trend. There are so many that I cannot note them all without making a complete mess of the chart. In fact, there is not a price pivot on this chart that is not in some way related to another through Fibonacci ratio analysis. For example, the level of the .618 extension indicated by the green arrow coincides with the level of the 1.618 Fibonacci extension of the line segment that extends up from the 2009 price low (670), to the first pivot at the 950 price level. Ratios within the zag segment up from the flash crash low (1014) include the second key pivot (1230) that is a ratio of 1.618 up from the first pivot (1130), and the third pivot (1348), that is 2.618 up from the first pivot (1130) and this level also aligns with the .618 zigzag extension (green arrow).
It is likely that the price reaction to the recent Fibonacci level first occurred in February and that the most recent pause is a re-test which could result in a push higher. When price pushes past a key pivot like the .618 extension, but lacks momentum like what is indicated by the RSI divergence, then I select a follow-up target using ratios obtained from the most recent segment, the zag in this case. By splitting the move up from the 1014 price level I have identified price level 1386 as a key ratio (1:1) and the target of a possible short-term move higher. If you follow the blue arrows over to the left you will notice that this level is also a Fibonacci confluence with a key Fibonacci retrace level (.786) of the move down from 2007.
The current weekly chart of the Dow Industrials provides a perfect example of a push higher. The Fibonacci confluence between the Fibonacci .618 zag extension up from the 2009 zig low highlighted by the green arrow and the .786 Fibonacci retrace of the entire move down from 2007 represents a Fibonacci confluence and a powerful resistance level. Price likely first reacted to this level in February as well, and has since moved through it to pause at the 1:1 ratio that divides the zag segment up from the flash crash low and identified by a blue arrow. In other words, an event could occur in the S&P that has already occurred in the Dow.
Click to enlarge
The Dow chart provides even more Fibonacci symmetry than the S&P 500 chart. Who can forget price reversing exactly at the 1:1 ratio of the now zig segment and the exact .618 extension in Fibonacci time (along the horizontal axis) of the 2007 to 2009 Crash shown by red arrows (1). Or, the Flash Crash occurring at exactly the .618 Fibonacci retrace of the 2007-2009 crash (red arrow 2). I recall staring at an intraday chart in real time on the day of the Flash Crash fully expecting a reaction to the Fibonacci .618 retrace level, but in no way envisioning the magnitude of the flash crash. It was a truly epic, surreal event in Fibonacci trading.
The 1:1 ratios in both the zig and the zag of the Dow Industrials chart makes me want to examine more closely how they are connected. It doesn’t take much effort for my Elliott wave trained brain to detect two zigzags joined by an expanded flat to form a larger Zigzag; a larger ZigZag that is probably now complete.
I next look at the Nasdaq 100. The Nasdaq 100 recently came within 40 points on a monthly chart of completing a 1:1 Fibonacci ratio zigzag up from the 2002 low. The zag segment further divides into a 1 to .618 ratio, and the prior zig segment divides into a perfect 1:1 ratio. Price is also bumping up against the top of the regression trend channel, two standard deviations above the regression trend line.
Click to enlarge
Clearly, there is a gauntlet of Fibonacci and other resistance at current price levels that must be cleared and turned into support in order for the market to move significantly higher. RSI divergences on the weekly S&P 500 chart have a recent multi-year history of coinciding with reversals, and there is currently one in effect. Divergences can “catch up” or continue for an extended period, however, so I have drawn a blue line on the RSI for the S&P and Dow which if broken would indicate a failure swing, which is a useful tool for corroborating a reversal in the trend.
The Elliott wave ZigZag interpretation I identified in the Dow Industrials is interesting because it makes sense of the failure of past corrective patterns identified since the 2009 low, and it receives strong support from Fibonacci ratios. In the overall picture, it is something to think about, but it is not decisive because there are other Elliott interpretations.
In summary, I have brought to your attention a handful of Fibonacci levels in the major indices, along with other technical indicators, that suggest the potential for trouble at current price levels and / or price levels directly overhead. These indicators are present on charts that represent the intermediate- and long-term trend. The recent reliability for these indicators present on the same charts for easy reference.
Fibonacci extension ratios on a vertical price axis typically encounter reactions at .382, .618, 1.00, 1.618 and 2.618. Fibonacci retrace levels usually elicit reactions at .382, .500, .618 and .786. Where these ratios occur in the overall price pattern is what determines their relevance.
In this weekly chart of the S&P 500 the green zigzag-shaped arrow outlines the .618 Fibonacci price extension from the Flash Crash pivot low (1014) up to the level of the recent price high at 1360/70. This is the zag half of the zig that originated at the 2009 low and extended to the April, 2010 high just prior to the flash crash.
Click to enlarge
I also use the Fibonacci circle in this chart. The Fibonacci circle in this case captures the spiral effect and symmetry of price for both the rise off the low from 2009 and the decline down from 2007. I use the Fibonacci circle in conjunction with a regression trend channel to identify Fibonacci pivots in both price and time directly along the axis of the trend. For example, while the green arrow shows that price has reached a .618 extension on the vertical price axis, it has not done so in the direction of trend (outer band of circle).
This weekly chart of the S&P 500 is a treasure trove of reactions to Fibonacci pivot levels along the vertical axis and along the axis of the trend. There are so many that I cannot note them all without making a complete mess of the chart. In fact, there is not a price pivot on this chart that is not in some way related to another through Fibonacci ratio analysis. For example, the level of the .618 extension indicated by the green arrow coincides with the level of the 1.618 Fibonacci extension of the line segment that extends up from the 2009 price low (670), to the first pivot at the 950 price level. Ratios within the zag segment up from the flash crash low (1014) include the second key pivot (1230) that is a ratio of 1.618 up from the first pivot (1130), and the third pivot (1348), that is 2.618 up from the first pivot (1130) and this level also aligns with the .618 zigzag extension (green arrow).
It is likely that the price reaction to the recent Fibonacci level first occurred in February and that the most recent pause is a re-test which could result in a push higher. When price pushes past a key pivot like the .618 extension, but lacks momentum like what is indicated by the RSI divergence, then I select a follow-up target using ratios obtained from the most recent segment, the zag in this case. By splitting the move up from the 1014 price level I have identified price level 1386 as a key ratio (1:1) and the target of a possible short-term move higher. If you follow the blue arrows over to the left you will notice that this level is also a Fibonacci confluence with a key Fibonacci retrace level (.786) of the move down from 2007.
The current weekly chart of the Dow Industrials provides a perfect example of a push higher. The Fibonacci confluence between the Fibonacci .618 zag extension up from the 2009 zig low highlighted by the green arrow and the .786 Fibonacci retrace of the entire move down from 2007 represents a Fibonacci confluence and a powerful resistance level. Price likely first reacted to this level in February as well, and has since moved through it to pause at the 1:1 ratio that divides the zag segment up from the flash crash low and identified by a blue arrow. In other words, an event could occur in the S&P that has already occurred in the Dow.
Click to enlarge
The Dow chart provides even more Fibonacci symmetry than the S&P 500 chart. Who can forget price reversing exactly at the 1:1 ratio of the now zig segment and the exact .618 extension in Fibonacci time (along the horizontal axis) of the 2007 to 2009 Crash shown by red arrows (1). Or, the Flash Crash occurring at exactly the .618 Fibonacci retrace of the 2007-2009 crash (red arrow 2). I recall staring at an intraday chart in real time on the day of the Flash Crash fully expecting a reaction to the Fibonacci .618 retrace level, but in no way envisioning the magnitude of the flash crash. It was a truly epic, surreal event in Fibonacci trading.
The 1:1 ratios in both the zig and the zag of the Dow Industrials chart makes me want to examine more closely how they are connected. It doesn’t take much effort for my Elliott wave trained brain to detect two zigzags joined by an expanded flat to form a larger Zigzag; a larger ZigZag that is probably now complete.
I next look at the Nasdaq 100. The Nasdaq 100 recently came within 40 points on a monthly chart of completing a 1:1 Fibonacci ratio zigzag up from the 2002 low. The zag segment further divides into a 1 to .618 ratio, and the prior zig segment divides into a perfect 1:1 ratio. Price is also bumping up against the top of the regression trend channel, two standard deviations above the regression trend line.
Click to enlarge
Clearly, there is a gauntlet of Fibonacci and other resistance at current price levels that must be cleared and turned into support in order for the market to move significantly higher. RSI divergences on the weekly S&P 500 chart have a recent multi-year history of coinciding with reversals, and there is currently one in effect. Divergences can “catch up” or continue for an extended period, however, so I have drawn a blue line on the RSI for the S&P and Dow which if broken would indicate a failure swing, which is a useful tool for corroborating a reversal in the trend.
The Elliott wave ZigZag interpretation I identified in the Dow Industrials is interesting because it makes sense of the failure of past corrective patterns identified since the 2009 low, and it receives strong support from Fibonacci ratios. In the overall picture, it is something to think about, but it is not decisive because there are other Elliott interpretations.
In summary, I have brought to your attention a handful of Fibonacci levels in the major indices, along with other technical indicators, that suggest the potential for trouble at current price levels and / or price levels directly overhead. These indicators are present on charts that represent the intermediate- and long-term trend. The recent reliability for these indicators present on the same charts for easy reference.
No positions in stocks mentioned.
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