Identifying Support and Resistance using Fibonacci Retracement.
Fibonacci Retracement is a series of logical Golden section number: 23.6%, 38.2%, 50%, 61.8%, 76.4%, 161.8%, etc. By determining the important highest and lowest points, the above Fibonacci Retracement will display important support and resistance levels.
Since the accuracy of Fibonacci is highly reputable, and it is being widely used. We will take a look at the Fibonacci retracement this week on the KLCI analysis as well as some case studies.
Chart 1: KLCI Weekly Fibonacci Retracement.
The above chart is the KLCI chart for almost 2 years, with its highest 1524.69 and its lowest 801.27 in October 2008. By applying the Fibonacci retracement, it shows that the Support and Resistance levels as follow:
| Retracement: | KLCI | Remarks |
| 23.60% | 972.00 | The KLCI broke above this resistance level in April, 2009, entering a bullish market. |
| 38.2% | 1077.62 | The KLCI was resisted by this level in May, 2009, and consolidated for a1 and a half month before, breaking new high, to resume its bullish trend. |
| 50% | 1162.98 | The KLCI broke above this level in the end of July, 2009, and this has became an important support since. |
| 61.8% | 1248.34 | The KLCI broke above this level on the 15th of October, 2009, however, due to the correction of markets across the globe, the KLCI failed to stay above this level, and current, the 1248 level is now the resistance for the KLCI (Study Chart 2 analysis for details) |
| 76.4% | 1353.96 | Another important resistance for the KLCI. |
Table 1: KLCI Fibonacci Retracement levels from 2008 to current.
Chart 2: KLCI recent uptrend with Fibonacci.
As shown on chart 2, other than the 61.8% retracement line (1248 pts), the T1 long term uptrend line is also an important support for the KLCI. As indicated by A, the T1 line and the 1248 fibonacci over-laps, which from technical point of view, suggesting a stronger support. However, due to the negative performance of markets abroad, the KLCI failed to maintain above these supports, breaking below the 1248 WinChart Automatic Fibonacci Retracement, showing sign of a weakening trend.
Meanwhile, as indicated by B, the Bollinger Bands expanded with the KLCI below the Bollinger Middle Band, which suggests a bearish biased signal. If the Bollinger Bands should continue to expand with the KLCI below the Bollinger Middle Band, the bearish biased movement is expected to continue. And the next support for the KLCI is at 1220 WinChart Automatic Fibonacci Retracement (23.6% retracement of 1058 to 1270). In other words, the KLCI has to break above the Bollinger Middle Band to avoid more downside risk.
Case Study:
Chart 3: IJMLAND – 5215, chart from 16/06/2009 to 29/10/2009.
As shown on chart 3, price of IJMLand rose from its low in June (RM 1.27) to its highest of RM 2.68 in October, 2009, and then followed by a technical correction. However, after the technical correction, price of IJMLAND managed to be supported by the RM 2.35 level. Which is the 23.6% retracement.
If price should rebound from RM 2.35 level, and break above the 14, 21, 31 EMA, it would be an end to the technical correction, and a chance to resume its uptrend. The next resistance shall be at RM 2.68 level. If volume should increased substantially, it would confirmed this bullish signal, and investors can apply the 14, 21, 31 EMA as the dynamic support as well as trailing stop reference.
On the other hand, if price should break below RM 2.35 level, it would suggests a bearish movement, while the 14, 21, 31 EMA will be serving as the dynamic resistance of the downtrend. Next support will be found at RM 2.14 level (38.2% retracement), which is around 10% downside room. In other words, if price should break below RM 2.35 fibonacci, it would be a signal to cut loss.
Latest Financial Summary as at 30/6/2009:
| 4 Q Rolling PER | 35.55 times | Dividend Yield | 0.00% |
| Dividend | Dividend Yield | Net Profit Ratio | |
| 31/03/2009 | 1.5 sen | 0.00% | 7.62% |
| 31/03/2008 | 4 sen | 0.00% | 14.13% |
| 31/03/2007 | 5 sen | 0.00% | -2.76% |
| 30/06/2006 | 5 sen | 0.00% | 9.07% |
| 30/06/2005 | 3 sen | 0.00% | 9.56% |
Table 2: IJMLand Financial Summary.
Chart 4: GENM – 4715, chart from 26/02/2009 to 29/10/2009.
As shown on chart 4, price of GENM was supported at the RM 2.74 (23.6% Fibonacci Retracement) during its consolidation, which is a golden section number based on the lowest of RM 1.84 in March, and the highest RM 3.02 in July, 2009. As indicated by A, price of GENM rebounded many times on the RM 2.74 level, suggesting that investors has grown accustomed to this level, or it suggests that the memory of investors is stronger at this level. Therefore, RM2.74 is going to be an important support level.
Meanwhile, T1 on Chart 4 is a descending trend line from its highest level, suggesting that price of GENM is consolidating while still supported by RM 2.74. Therefore, it forms a Triangle pattern. The fluctuation of price within the T1 line and the RM 2.74 support level is getting small, thus suggesting that it is preparing for a new movement.
If price should break above the T1 descending trend line, there is a good chance that price is breaking away from this consolidation, and maybe forming an uptrend, by then, investors can apply the 14, 21, 31 EMA as the dynamic support as well as the trailing stop reference. On the other hand, if price should break below the RM 2.74 support level, this is a risk of a downtrend formation, thus a signal to cut loss, and the next support level is seen at the RM 2.57 level (38.2% Retracement).
Latest Financial Summary as at 30/6/2009:
| 4 Q Rolling PER | 28.53 time | Dividend Yield | 2.51% |
| Dividend | Dividend Yield | Net Profit Ratio | |
| 31/12/2008 | 7.00 sen | 3.13% | 12.98% |
| 31/12/2007 | 6.48 sen | 1.71% | 35.74% |
| 31/12/2006 | 27.00 sen | 1.86% | 24.84% |
| 31/12/2005 | 24.00 sen | 2.14% | 26.80% |
| 31/12/2004 | 20.00 sen | 2.00% | 26.54% |
Table 3: GENM Financial Summary.
Conclusion:Technical analysts use Fibonacci Retracement to calculate the Retracement target of price after a rally, or the rebound target after a decline, and the idea of Fibonacci Retracement is also widely accepted by investors, and it is based on the highest and lowest range of a rally or a decline. Originally, the Golden Section number series is derived from nature's law, but when applied on to technical analysis, its accuracy is highly remarkable. The above study examples showed that if applied properly, investors could have an idea of the resistance or support level ahead of time, which would help them in planning their trading plan.
