After refining some of my techniques, I decided to look back on this post and the market and see how things worked out – as I recall, the market didn’t sell off as far as I thought it might – instead, it we up from there! I decided to take a fresh look at that Monday, 12/19/16, with the new techniques I’m using now, also based on Fibonacci levels.
Here’s how the market performed on that Monday.
What happened? Based on the fib levels I drew, I expected a deep sell-off, but the market went up instead! Again, it would seem that levels work, but which levels? The ever-present question, it seems.
To get the answer to that, it is necessary to go back in time almost 100 years to the work of a man named Bill Gann, or W. D. Gann, as he was known to his readers. Gann made a considerable amount of money in the stock market by predicting turns and price levels – in other words, predicting when price would turn and where it would go. He made annual forecasts a year in advance, on market direction, based solely on mathematical calculations of market cycles. You can read those forecasts here.
T. Henning Murrey built upon Gann’s work and produced software that would draw precise turning points in the market (called “pivot points”). You can see the results of part of that work as applied on the Sierra Charts platform for that Monday, here.
It became instantly clear what happened – price bounced off the oversold line on Friday, then headed back up. Remembering that price always moves from support to resistance and back to support in a never-ending cycle of buying and selling, we can instantly see why price moved back up – back to the line marked “Major S/R”, which is a major pivot point for the market. Price often stalls at this line before moving back up to resistance – in this case, it pulled far back to a support zone before being bought up to a new recalculated resistance zone on Tuesday.
By the way, here’s the chart for Friday. 01/20 – you can see how precise these zones can be.