Anatomy of a Fibonacci Price Cluster

 | Apr 24, 2013 | 9:30 AM EDT  | Comments
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Stock quotes in this article:

de

Many times I will identify a trade setup for you by providing a Fibonacci price cluster zone for you to consider a trade against. Today I'm actually going to show you how I came up with a relatively tight price decision in Deere (DE), in order to help you understand how these zones are identified. 

Single Fibonacci price retracements by themselves don't get my attention, but the coincidence of at least three Fib price relationships within a relatively tight range do. This is what I call a Fibonacci price cluster.

In the daily chart of Deere, below, I have labeled all the swings used to come up with a cluster at the $81.06-$81.54 area. You can prove this to yourself by running the same price relationships if you are so inclined. Here are where the levels came from:

  • 100% projection of May 3, 2012, high to the June 4, 2012, low from the Jan. 30, 2013, high
  • .618 retracement of the July 25, 2012, low to the Jan. 30, 2013, high
  • 1.272 extension of the Nov. 21, 2012, low to the Jan. 30, 2013, high
  • 1.618 extension of the Feb. 25, 2013, low to the March 15, 2013, high
  • 1.618 extension of the April 2, 2013, low to the April 11, 2013, high

So we had the confluence of five price relationships at that zone. The actual low was made at $81.58, which was just $0.04 above the top end of the price cluster. As of April 23, we have seen a rally of $3.63 from this low, and we are already moving into a bit of a resistance hurdle at the $85.41-66 area.

 

DE Daily
DynamicTrader

 

Since this trade setup has already triggered on a 30-minute chart for a swing-trade entry, I want to show you how you can set up a pullback for a possible secondary entry in this stock with your risk being well defined.

Let's look at the 30-minute chart next. Note that the first area I would look at for an upside target comes in at the $88-$90 area, with an ultimate potential target at $99.41.

 

DE, 30-Day
Dynamic Trader

 

The initial buy trigger on this chart below fired off when both the eight and 34 ema crossover to the upside was seen. Since this signal already fired off last Friday, I can identify a secondary entry zone by running new price relationships on the 30-minute chart. Typically, I look for a pullback that is anywhere from 50% to 78.6% back to the last low. It is even better if some of my 100% projections (a.k.a. measured moves) overlap one of these retracements.

Right now, this gives us a pullback zone of $82.97 to $83.79 to look at for another entry, with the risk then defined under the prior swing low at $82.36.  Keep in mind if the $85.21 high is taken out, these support levels need to be recalculated!

Let's see if Deere allows us a graceful entry.

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