Fibonacci lines often generate the most heated discussions amongst traders. There are those that swear by them and those that claim the by-product is more haphazard and or random than predictive. If you are not familiar with Fibonacci it is worth a read. To briefly summarize Fibonacci’s theory, it states that numbers have a relationship and therefore generate a pattern of behavior which can be observed and predicted.
Using the Fibonacci Retrace tool, we have drawn a line from the 2009 high to the 2010 low. Fibonacci’s should be used in conjunction with several other forms of technical analysis. When price hits a Fibonacci level we are looking for price action to bounce higher or bounce lower. Lets take a look at the 38.2% level and the 61.8% level. These are usually the more significant levels where technicians expected to see more significant price action. At the 38.2% (green arrow) we see a tremendous break higher on the daily candle followed by a brief period of consolidation before price resumes its move higher. The 61.8% (see black arrow) level where current spot is trading is acting as strong Resistance and we therefore are seeing the bounce lower.
The CHF has had a remarkable retrace versus the Greenback. However, we now see it hitting a period of consolidation between the Fibonacci 61.8% at 1.06 and 78.6% at 1.03. We used the low of 2009 and the high of 2010 to set the Fibonacci high/low parameters. Notice how the 1.06 handle is acting as strong Support for the CHF as it has bounced off that level without closing higher for nearly 2 months (see black arrows). A close back above 1.06 would suggest CHF weakness while a close below 1.03 would keep the CHF bulls charging.
The GBP has been trading stronger than the EUR, though the EUR made a nice pullback against the Pound at the 23.6% Fibonacci level. Using the most recent high in 2009 against the low of 2010 the 23.6% Fibonacci Retrace level is generated at a .8384 handle. To show the significance of this level we point to the number of times the EUR failed to overtake it (see black arrows). Furthermore, the one time the EUR managed to cross above it, significant price action ensued (green arrow). Recall that this level is nothing more than a level generated by using the Fibonacci Retrace methodology between a high and low point in order to generate potential levels of support and resistance based purely on price.
Written by bforex.com