Applying Fibonacci Retracement to the Market Decline

Yesterday, I talked about how Fibonacci retracement levels help investors get in tune with the market’s natural inhale-exhale rhythm.

Well, yesterday the market’s exhale continued. The S&P 500 was down almost 1.5%.

The real question: is this the start of a bigger downturnrn or a buying opportunity?

We, of course, can’t know the answer to that question with certainty. But again, Fibonacci levels allow us to plot out key spots on this market’s battleground.

Here are Fibonacci retracement levels applied to the recent uptrend, from the June 4 low to a September 14 high…

See image larger

So what does this tell us?

It tells us that 1,400 is a key level for the S&P500. It’s a zone of support and the all-important 38.2 Fibonacci level (the yellow line above).

If the uptrend is healthy, the market will fall to this level before regaining strength and moving higher again. Buying stocks at the 1,400 level could give investors a nice 5% discount – a worthwhile buying opportunity.

But there’s no guarantee this level will “hold,” as we say in the trenches. The correction could be deeper given weak economic conditions, a disappointing earnrnings season and uncertainty around the U.S. election and fiscal cliff.

We’ll have a better gauge of the market’s short-term direction by next week. But one thing is clear: 1,400 is the level to watch.

If you haven’t done so already read the Survive & Prosper issue on “Baby Boomers Are Retiring”