Fibonacci Retracements and Convergence-Divergence
It’s natural to measure the “quality” of a bounce by the percentage of the rally off the low but, ironically, this often yields false conclusions. A better way is to measure the percentage of the retracement into the prior downswing, using the Fibonacci tool.
Here’s an example:
The above chart shows the Russell-2000 Index Trust (IWM). Its bounced about 7.6% off its low and tagged the 62% Fibonacci retracement.
Now look at the next chart…..
This chart shows the Oil Services HOLDRs Trust (OIH). It’s also rallied 7.6% off its low BUT has retraced just 38% of the prior downswing. This tells us that oil services are LAGGING small caps in this bounce attempt, although both instruments have rallied the -exact- same price percentage.
This type of information is especially useful when examining leader-laggard relationships between the SP-500 and Nasdaq-100 index futures because Nasdaq-100 leadership points to speculation and trending markets, while SP-500 leadership points to safety and trading ranges.
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