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How to Trade the S&P 500 Rebound Using Fibonacci

How to Trade the S&P 500 Rebound Using Fibonacci

Gregory McLeod, Currency Analyst

Talking Points:

  • The SPX500 is the CFD instrument that tracks the S&P 500 which non-US residents can trade.
  • After three straight days of declines, the Index is setting up for a rebound from the 38.2% Fibonacci retracement level.
  • Fibonacci retracement levels can be used to determine price targets.

Fibonacci retracements are a great tool for not only places where prices may turn around but they are also quite useful in finding potential price targets. Forex traders, as well as equities and futures traders make use of these centuries old levels.

The SPX500 (S&P 500) index responds well to Fibonacci retracement levels. Since hitting a historic high of 1899.10 on April 4th 2014, the SPX500 had declined for 3 sessions. Through the carnage of a 62 point decline, the index stopped at a Fibonacci level much like a car stops at a red traffic signal.

Learn Forex – SPX500 4-Hour Chart Rebound from 38.2% Fibonacci

(Created using FXCM’s Marketscope 2.0 charts)

In the 4-hour chart above, you can notice the uptrend and the pullback. We use the Fibonacci tool when we have a confirmed high and low. Next, by simply taking the Fibonacci retracement tool in the FXCM Marketscope2.0 charting package and clicking the 1738 February 3rd 2014 low and then clicking the February 4th 2014 on the high, a series of numbered Fibonacci support lines appears on the 4-hour chart. These lines represent hidden levels of potential support and resistance.

These levels can be used to anticipate possible entries. By entering near a confirmed level of support, we increase the odds of success and reduce the amount of risk needed on the trade in question. Price could break below support and proceed down to the next level of Fibonacci support. The SPX500 has found support at the 1837.60 area which is the 38.2% Fibonacci retracement zone.

Learn Forex – SPX500 Daily Spinning Top Range Breakout

(Created using FXCM’s Marketscope 2.0 charts)

Finding Take-Profit Zones

Zooming out to a daily SPX500 chart and adding a Fibonacci retracement starting from the 2/4/14 high to the 4/8 low of 1836.60 low we get potential areas of Fibonacci resistance that can act as profit taking zones. These areas are highlighted by the green rectangles. The 38.2% Fibonacci level at 1860, would be a first target. Other price targets are the 50% Fibonacci level at 1867, the 61.8% level at 1875, and the 78.6% Fibonacci level at 1885. Additionally, the old high near the psychological 1900 level would be next.

Other Entry Points

Ideally, we would like to get bounce from a retest of the 1837.60 level. However, price action may not cooperate with our fondest wishes. In such a case, we can use a narrow range candle breakout strategy to enter the trade. Buying a breakout above the 1852.60 spinning top high could signal further upside gains. Forex spinning tops and doji’s are narrow range Japanese candlestick patterns that frequently exhibit breakouts. In the chart above you can see earlier on 3/27 a spinning to candlestick breakout above 1855.10.

In addition, the CCI oscillator can be employed to confirm the move. Wait for the CCI indicator to move above -100 to signal a buy. However if the SPX500 closes breaks below 1836.60, more losses can be in store for this index. Remember to always trade with stops.

---Written by Gregory McLeod Trading Instructor

This article showed you how to use a Fibonacci to find a SPX500 entry. I want to invite you to enroll in our free Fibonacci Retracement Course to really grasp the Fibonacci trading concept on a deeper level. Sign our Guestbook to gain access to this course. You will automatically have Universal access to other courses.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.