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According to Dow Theory, in a bull market we see a succession of higher highs and higher lows due to an upward change in expectations and the resulting supply and demand for a stock. Prices, however, have a tendency to retreat after one of these higher highs, this reversal being known as percent retracement (the percentage value that prices retraced from the high to the low). Day trading experts may combine this methodology with Fibonacci retracements in order to make predictions of where intraday moves may falter, but it is a highly subjective process, requiring large qualtities of trading experience to implement properly. For example, if a stock moves from a low of 500 to a high of 1000 and then retraces to 750, the move from 1000 to 750 retraced 50% of the original move. This obviously dovetails in nicely with Fibonacci Levels, and has provided many a trader with a platform upon which to base his custom trading system, with retracements of up to 33% and 50% being common, while more than 66% probably means the bull move is over. (Note - the Fibonacci levels are 38.2%, 50%, and 61.8%). For a bear market, the inverse is said to be true. |
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