History & Background
Leonardo Bonacci (c. 1170 – c. 1250)—known as Fibonacci (Italian: [fiboˈnattʃi]), and Leonardo of Pisa, Leonardo Pisano Bigollo, Leonardo Fibonacci—was an Italian mathematician, considered to be “the most talented Western mathematician of the Middle Ages”. Read more. He is credited with introducing the Fibonacci sequence, which has since been used as part of technical analysis. Based on Fibonacci sequence, retracement levels can be derived to alert traders or investors of a potential trend reversal, resistance area or support area.
From StockCharts.com: Retracements are based on the prior move. A bounce is expected to retrace a portion of the prior decline, while a correction is expected to retrace a portion of the prior advance. Once a pullback starts, chartists can identify specific Fibonacci retracement levels for monitoring. As the correction approaches these retracements, chartists should become more alert for a potential bullish reversal.
Based on depth, we can consider a 23.6% retracement to be relatively shallow. Such retracements would be appropriate for flags or short pullbacks. Retracements in the 38.2%-50% range would be considered moderate. Even though deeper, the 61.8% retracement can be referred to as the golden retracement. It is, after all, based on the Golden Ratio.
Shallow retracements occur, but catching these requires a closer watch and quicker trigger finger. The examples below use daily charts covering 3-9 months. Focus will be on moderate retracements (38.2-50%) and golden retracements (61.8%). In addition, these examples will show how to combine retracements with other indicators to confirm a reversal.
Possible Retracement Levels Of FBMKLCI
Using the Fibonacci retracement method, based on weekly chart of 10-year historical trend of Malaysia’s FBMKLCI index, possible retracement levels (i.e support lines) can be seen at the following level:
- 23.6% : 1,638.1
- 38.2% : 1,479.3
- 50.0% : 1,351.0
- 61.8%: 1,222.7 (Golden Ratio) – significant retracement level
- 78.6%: 1,039.9
The FBMKLCI index is currently hovering around its 23.6% retracement level (1,638.1), which is described as a “shallow” retracement / support level. It is observed that the technical indicators & trading volume seem to suggest the support level is relatively stronger when FBMKLCI is trading closer to 1,500 points which is below the 23.6% retracement level. Further, since Sep 2015, we did not see any significant oversold positions or major volume increase that would further substantiate this retracement level to be a strong support level. This leads to the million dollar question: would we see further retracement in the FBMKLCI to the 38.2%, 50.0% or even 61.8% retracement level?
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