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2019-08-20
THE NEXT BREAKDOWN AND THE SETUP


If you’ve been following our research long enough, you’ll remember that we often discuss Fibonacci Price Theory and how we use it to try to identify opportunities and trends in the markets.  The basic premise of Fibonacci Price Theory is that price is always seeking to establish newer highs or newer lows with every rotation on the charts.  The theory is rather simple to understand and learn and it helps easily identify where support, resistance, and the trend is established.  Let’s take a minute to go over the basics of Fibonacci Price Theory before we continue.

This first example of Fibonacci Price Theory trend is a simple example that highlights the basic premise of the theory – price move always attempts to establish new price highs or new price lows in a trend.  Therefore, in a downtrend, we would attempt to observe price in a simple structure as you see on the left side of this example – establishing new lower lows and new lower highs in a series of waves.  In an uptrend, we would attempt to observe price in an opposite structure where new higher highs and new higher lows are set up.  Fairly simple so far – right?

In complex price rotations, we have to understand that we are changing the perspective of price trend when we are looking at different intervals of price data.  When we are investigating a 10-minute chart, we will see shorter-term Fibonacci price structure which may appear to be counter to our longer-term charts (Daily, Weekly or other intervals).  This is because the Fibonacci Price Theory works on all intervals and attempts to identify price structure and trend based on price rotations and true price structure.

In the complex example, below, we’ve drawn some samples that show price rotation within a trend.  The first example, on the left, is a continued DOWNTREND with a failed bullish high near the middle.  This happens often as price enters a congestion period.  Notice that after the initial new low, price rotated within a range, then broke out setting up the bullish “new high”, but then immediately failed and moved lower.  Sometimes you’ll hear us report this type of setup as a “washout high”.  This failed trigger immediately sets up a bigger downside price move as the price was unable to find support above the previous high levels.  As soon as price rotated lower after that peak and took out those previous highs, we should have been very cautious of the upside potential.  When it took out the most recent low (shown with the PINK box), that was our trigger that the bullish trend was OVER and the new bearish trend was setup.

On the right side, we have a complete price rotation (from bullish to bearish).  We can see the upside trend initially set up with a new price high, then price consolidated into a range.  Once price broke above the most recent range high (highlighted with the PINK box), that was a new bullish trigger that price should attempt to move higher.  After it broke the previous GREEN peak, that provides even further confirmation of an uptrend.

Once the second big peak setup, the price moved lower to set up a rotational low and high price that established our Fibonacci Price Theory trigger range.  A move above that last high would provide confirmation that the trend should continue to move higher and a move below that last low would provide confirmation that the trend has reversed into a bearish trend.  The price moved lower (see the PINK box) and we set up a new bearish price trend based on these simple price rotations.