How to Use Fibonacci Retracements to Find Market Entries

Will the S&P sell off?

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Hey everyone. Josh Martinez here with tradersagency.com, and welcome to this week’s idea. Today’s date is August 2nd 2021. Happy Monday, everybody. Behind us is the S&P 500 on the monthly timeframe. We are looking at the E-mini future side. Every E-mini contract, every tick is worth $12.50. Every micro contract, every tick is worth $1.25.

Okay, so let’s build some foundations here. Traditionally, what ends up happening with the markets, our belief, is markets U-turn at, on, and/or around the same price point. One of the things that we do is we will monitor these waves through trend lines. When the market is at a high price, we can use techniques such as Fibonacci sequences. Now, in our… We’ll link a description… In the description, we’ll link our Fibonacci video, but you should really take a moment and learn Fibonacci because when a Fibonacci extension is fulfilled, normally sell offs take place.

Fibonacci will help us identify hidden levels of U-turn where buyers and sellers hang out. When the markets hit a Fibonacci extension, anyone who’s buying the mark on the way up will essentially take their profits and the market begins to sell off. It brings it back to the uptrend line. People start buying again, and then the history continues on. Now, why is that important? It’s important because we’re seeing that pattern take place. This is the S&P 500 on a monthly timeframe, and we have this up Fibonacci sequence. When, last year in 2020, when the market hit the Fibonacci extension, it sold off by 11%.

If we take a look at the new Fibonacci sequence, we’re pretty much right there. Why is this important? This is important because 4460.25 is the monthly Fibonacci extension. If we hit that, we could have another 11% sell off. 11% sell off would bring us down a handful of thousands of ticks, which is a pretty substantial move. How fast could the move be? Basically a month or two months. Why do we say that? Because this took place after this Fibonacci extension was hit right here, this 1.618 hits the market sold off just over 11% within one single month, because anyone who was buying the market on the way up, they took profits and it brought the market down.

There’s a couple of things that we can do in this scenario. Number one, we need to be aware that there’s an opportunity here. Number two, we need to create a plan of action. Everyone’s plan is a little bit different. My plan is a very basic plan. I believe that the markets are going to continue to go up for the next handful of years. Because of that, I’m going to be out of the market after 4460.25 is fulfilled. After 4460.25 is fulfilled, I plan on exiting any buy position on the S&P 500 on the future side, and then waiting for the sell off to take place.

After the 10, 11% selloff takes place, I’m going to look to buy the low on the way back up. It’s no different than what we do here, we buy low, we profit high. We buy low, we profit high. It’s just, well, we have the patience and, well, we have the ability and the discipline to not trade against the trend, because if we’re still going up and we take profit, and then the market sells off and then we buy low, we’re in a very, very strong position of success. If we can’t do that, we try to trade against the trend and we’re wrong and the market keeps going up, then that’s where real trouble comes in.

Now, some people will say, “Hey, Josh, if you know the market’s going to sell off, why don’t you just sell it?” I don’t know. That’s the thing, I don’t know. Trading is a game of probabilities. Trading is success over time. It’s not success one time. What we do is we will learn these techniques to recognize patterns within the marketplace. We use Fibonaccis, trend lines. We use support resistance council formations. We have these rules like trading with the trend, not against the trend so that we will, in the long run, be right more than half the time. With good risk management, that’s how we find success over time.

This week’s idea is very simple, short and simple. It’s just to say, “Hey everyone, be aware. 4460.25 is a monthly Fibonacci extension.” Normally what ends up happening when a monthly Fibonacci extension is hit, the market will surpass it by a little bit. It could be… This is like a 5,000 tick move here. It could go, because it’s less than 3.2 pounds, it could surpass it by 10%. We could see about a 500 tick rally above 4460.25, and then a sell off take place. We’re approaching the range. When we approach the range, indecision takes place, consolidation takes place, a fight takes place.

The buyers who brought the market up, okay? Some people are going to start taking their profits and a buy becomes a sell. That’s going to bring the market down. People who are not aware of this are going to try to buy the dip, and it’s just going to keep on dipping. Be aware of it. We’ll monitor this. We’ll probably come back to it in a couple of weeks, but we wanted to bring it to light now before the Fibonacci extension is hit.

Hey everyone, this is Josh Martinez and that’s this week’s idea.

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