I would like to continue with some analysis this time using $AAP – Advanced Auto Parts and show how looking at charts over a longer time period can be very helpful in becoming more profitable. I will post several variations of $AAP’s chart with different annotations to help explain how this technique can be useful. I also want to talk about Fibonacci Retracement and how it can be used to help predict future support and or resistance levels after big stock moves.
In the first image I wanted to show how a support level that existed prior to a big move can be used many years later and in this case five years later.
Notice the period from April through October 2013 became a period of consolidation (Stock holds a tight trading range where neither the buyers or sellers overcome each other.). Fast forward five years after the 151% move to the upside and the stock retraces back to the exact same support level where it gets bought. This should be a significant observation for traders because it presents a very reliable trading opportunity along with a good risk reward. A stop can be placed below the support level and the reward could be as high as a return to the All Time High or even a breakout above.
Now we will look at a very popular tool used by technical traders called Fibonacci Retracement (Fib for short.). Fibonacci Retracement is based on the key numbers identified by mathematician Leonardo Fibonacci in the thirteenth century. However, Fibonacci’s sequence of numbers is not as important as the mathematical relationships, expressed as ratios, between the numbers in the series.’ (Source: Investopedia.com)
The reason that Fib Retracement levels becomes so important is because intermediate and professional traders use them. The retracement levels are based on math but they hold a psychological element that can’t be denied. The more charts you spend time analyzing the more you will be amazed at how one could make a living taking trades based solely on Fib. Traders will put in automatic buy orders based on these retracement levels with the 61.8%, 50% and 38.2% being the most popular. The 50% retracement out of all of these three is probably the most popular but we can’t place a generalized statement on that number. Each retracement will be different and they will depend on the following:
Fibonacci Retracement tools are found on almost all trading platforms and also very easy to use once you get familiar with them. All that is required is to select the tool, click the highest price candle (Choose the peak of the wick.) and then click the lowest point of the candle that started the run. See example below of $AAP:
I have included a youtube playlist I made that I believe could be very helpful in expanding your knowledge of using Fibonacci Retracements. You may not need to watch both videos but if you are unfamiliar with Fib then I would suggest watching at least the first.
Now that we have our chart setup with Retracement levels we can start to see how important these levels become by using $AAP.
The chart is labeled but to re-emphasize take a look at the the 50% retracement level late 2016/early 2017. Notice how it bounced very hard off of this level and then tried to break through the 78.6% retracement level but failed. The move from the 50% retracement level to the 78.6% is nearly 35 points and a trade could have easily been managed with a stop below the 50% level or $140.74. The failed break at the 78.6% level occurred over a period of three months and if profits weren’t taken after the first and second failed attempt a wise trader would have exited the trade after the third candle failed and broke below the low of the previous candle.
What I always find comical is when people tell me “using charts doesn’t work”. Let’s take a look at what happened when $AAP hit the origin of its 151% run, or if you remember from earlier, the support level from middle to late 2013. Notice how the stock immediately bounces and is now potentially on a run that will recover some or all of it’s retracement. If I took this trade at the support level then I would be cognizant of each of the upcoming prior retracement levels. These levels will be points of contention and profits will be taken. Adjusting manual stops, a trailing stop or price alerts sent to your cell phone would be important tools you can use to ensure profits in case of a reversal.
I wanted to share my perspective of this chart because I think it does a great job of showing you how technical analysis can be very beneficial and how great it works. This technique can be used on any traded asset and can be used on multiple time frames. Whether you are a swing trader, day trader or even an investor using tools like Fibonacci can be very beneficial.
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Mark aka TheBossTrader