Sunday, March 6, 2011

Convergence of Fibonacci 161.8% Retracement & 61.8% Extension

With the convergence of these two Fibonacci levels I had no doubt the market would turn lower following the action Friday, February 18. The 161.8% level up from the 38.6% retracement during the summer gave a strong inclination of the end of a move. Our friends over at ShadowTrader pointed out the 61.8% level of the Fibonacci Extension over a week prior to the run up. They also pointed out the strong inclination of the overall market to turn at those levels. With both of these occuring at the same price it was time to load the boat with put options and more conservatively put spreads. This was a fantastic trade over the next few days with the /ES futures gapping lower from Friday and starting the short week after President's Day substantially lower. We were able to take profits on the down trend both Tuesday and Wednesday. The trade continued in our favor as Thursday the /ES retraced up 78.6% only to gap lower on the next day. This will be shown in more detail in the next post.