Retracements
The following forecasting method is an approach to charting price
retracement in stocks, commodities, indexes, or any free market. It is a
study of momentum, an evolution somewhere between Gann and Elliott Wave
that allows traders to project an ideal entry price in a stock after a
correction in price.
In this approach, a price move of any proportion will attempt to
retrace itself by 50% to 62%. I know the purists use 61.8%, but I have
found 62% serves me well.
A trader who applies these correction techniques spelled out in the
following calculations, will quickly develop a new market perspective, a
perspective of market direction. When a trader uses this wave analysis in
combination with cycle analysis, as I do, the probability of success is
magnified.
Remember that stocks do not go straight up, nor do they go straight down.
The validity of this technique is enhanced by the fact that it can be
used for intraday trading or longer-term projections. In my own trading, I
use it with 5-minute and 10-minute bar charts, yet it proves it accurate
over other time frames too.
It can be applied to rising markets as well as declining ones with no
noticeable difference in results.
Let's look at Varian Semiconductor Equipment, VSEA as an example.
The example here in VSEA is using 60-minute bars as the time frame.
VESA is an example of a projected price correction. By measuring from the
low of July 21 at 17 before the breakout to the high on July 30 at 2 4
�. We can make the following calculations to determine the ideal
correction pattern:
Step 1. 50% retracement in both price and time
A) Find the number of points difference from low to high: 24 1/2
(high) - 17.00 (low) = 7.50 points
B) Calculate 50% of the point difference from low to high: 7.50
(points difference) times 50% = 3.75 points
C) Subtract the 50% difference from the high: 24 1/2 (high)
– 3.75 (difference) = 20.75 (a
50% price retracement)
Step 2. 61.8% retracement in both price and time
A) Find the number of points difference from low to high: 24 .50
(high) – 17.00 (low) = 7.50 points
B) Calculate 61.8% difference from low to high: 7.50 (points
difference) � 0.618 = 4.65 points
C) Subtract the 61.8% difference from the high: 24.50 (high)
– 4.65 (difference) = 19.85, a 61.8% price retracement)
These are the two points to look for as a low in a continuation of a
move in a stock.
I prefer to look for 62% retracements as the risks are usually lower and
many times show that the stock is an early set up of a 5 wave move. The
move could be an up move or a down move.
As you can see, VSEA retraced 62% of its last major move. VSEA looks
like it is now moving up again.
I would Buy VSEA here.
I would place my stop at 20.
