Anyone interested in Technical Analysis would have read about Fibonacci Retracement, projections and the fractal nature of markets. Typically, analyst use the prior up-swing to identify potential area of support in an uptrend and vice-versa. It is our attempt through this post to twist this perception about retracements and how they are measured. Have a look a the daily chart of Nifty featured below.
If you notice, the correction, represented by the CD swing, is almost equal to the prior correction marked by AB swing. Is it identical and exact ? Nothing is exact or 100% in stock market as we are trying to measure an abstract concept, of behaviour of buyers and sellers, via price action.
Let’s take this discussion a step forward. Kindly direct your attention to the Daily chart of ITC featured below, which has a set of parallel trendlines. Ponder over this question “What are these lines capturing? What is so magical about them?”
I am sure most of you would have got the answer. Let me explain for the ones still struggling. These parallel lines try to capture 100% retracement of the prior swing.
ITC is now traded right at the lower parallel. Will the lower trendline arrest the fall? I don’t have answer to this question. But as a trader, the odds are definitely in favour considering a long trade with a stop at Rs.270, for a target of Rs.320.
Please be reminded that the usual disclaimer and disclosures apply. The attempt here is to explain the concept of retracements and not to dish out trade ideas.
Trade Safe and Don’t Get Hurt.