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 AMGEN Inc., (NASDAQ: AMGN) as an example.
The example here in AMGN is using 60-minute bars as the time frame.
AMGN is an example of a projected price correction. By measuring from the
low of August 10, 1999. AMGN was in a trading range prior to this up move
on August 10.
Using trend following methods like moving averages or MACD would have
generated a couple of trades with small losses.
The move that started on August 11 saw AMGN move up from 74 �
to 84 13/16. That was a steady upward move of 10 points and a nice gain in
the stock.
From August 16, AMGN started its retracement. I like the math in this
one. It is easy.
A 62% retracement of 10 points is 6 points. Notice how AMGEN retraced down
6 points from the 84 13/16 high to the 78 area.
With a small handle forming with Friday's action, AMGN looks poised
to continue its upward move.
This is also a trade that can be entered with good risk control.
If AMGN is going to move up, entry can be made by using a Buy stop
order and a close stop under the congestion range entered.
I would Buy AMGN at 80 3/8 on a Buy Stop.
I would enter my stop at 78 3/8.
