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Blending Technicals For A Thorough Analysis – Fibonacci Retracement, The Finale
Education | 30 August 2013
By: Shane Goh
Articles (99) Profile

We ended off our last article promising you one robust analysis tying together Fibonacci Retracement and Extension along with other indicators to create scenarios, which would equip you with potential share price movements before they unfold. Here’s two.

Previously, we used historical charts to validate our analysis. However, in our final instalment, we have decided to conduct our evaluation using the latest stock price developments – to give you a realistic experience before you proceed to apply Fibonacci to your favourite stock picks.

Figure 1: Day Chart For City Development

Source: ChartNexus

In the day chart for City Development (Figure 1), we have displayed Fibonacci retracement and extension levels combined with the RSI (Relative Strength Index), MAs (Moving Average) and trend lines. Following a downward move (point A to point B), we have mapped out a Fibonacci Extension to project potential target levels beyond its recent low (point B) and two trend lines (point A to point C and point D to point E) connecting the highs and lows of the share price.

Here, we note that the trend lines look parallel to each other, creating a channel which the stock would trade within until a significant breakout occurs on the upper or lower trend line. We would like to bring your attention to one particular price activity – point F – where the upper trend line intersected with a Fibonacci Retracement level, which displayed a strong potential resistance. This was further reinforced with an RSI level above 70 (point L), signalling an overbought scenario.

Next, the faster MA (14 days) had crossed the slower MA (50 days) from above in two instances (points G and H). Despite upward MA crossing at point I, the crossover was quickly reversed at point H. Although the stock experienced another upward MA crossing at point J, we witnessed at point K that the faster MA is on the brink of cutting the slower MA once more, and we should be very cautious of entering the market given this indication.

Moving forward, two possible scenarios may pane out: 1) The stock price will continue to trade within the channel towards the 100% Fibonacci extension level, which should see a downward crossing of the MAs but face the RSI moving below a level of 30, signalling an oversold situation. 2) The share price will attempt to break the upper trend line and trade towards the 61.8% extension level (or 38.2% retracement level), resulting in the faster MA continuing to advance above the slower MA while the RSI will push towards the level of 70.

Figure 2: Day Chart For Keppel Land

Source: ChartNexus

Next up, we have the day chart for Keppel Land (Figure 2). Once again, we have applied the same four indicators used in Figure 1 to the movement from point A to point B. Although we would not have the trend line (point A to point C) prior to the downward continuation pattern at point D, we note that it tested the 50% retracement level twice, but failed, before proceeding down.

In this analysis, we observed that after the crossing of MAs at point E, the MAs moved away from each other, suggesting a potential upward trend beginning as the faster MA pushed up higher than slower MA. Additionally, we notice that the RSI is nearing the level of 30 (point F), suggesting a potential buy signal coming up.

Looking ahead, two possible scenarios could pane out: 1) The stock price is held up by the 76.4% extension level (or 23.6% retracement level) while RSI veers away from the buy zone, resulting in an ascending surge, supported by an upward crossing of the MAs (point E), as it attempts to break the trend line 2) The share price breaks the 76.4% extension level and heads towards 100%, reaffirming the downward trend line but pushing the RSI into the buy zone. At this point, we will look for a confirmation from a reverse crossing of the MAs to sustain the down trend.

By now, you would have realised that the indicators will not always agree with one other and in your analysis, it is highly likely that some will produce buy signals while others will show a conflicting signal. It is important to note that relying on all available indicators at once might not be ideal as you may be confused on which to rely on. A better strategy would be to test out various combinations of indicators and narrow down the few which you are comfortable using, followed by tweaking and practising to identify your preferred style. There will never be a perfect analysis, but it is crucial to develop a system that you are confident of.

To reiterate a point made in our previous article, while no one can predict the future, a thorough analysis will allow us to be better prepared when the stock trades to the levels we have identified and enable us to act quicker and more decisively.

Currently pursuing his Chartered Financial Analyst qualification, Shane provides coverage on the property, consumer and environmental sectors at Shares Investment.

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