Why A Fibonacci Trader Bought ES At Today's Lows

The current bull market is one of the longest in the history of the US market. However, since late December 2013 the market has traded in a fairly narrow range, if you exclude the "dump" that occurred in the last week of January and first week of February 2014. This range is visible on the 240 minute chart of ESH14 (the current SP500 e-mini futures contract), the trading range has been between 1809.50 and 1856.75:

Since a trader has to trade to earn a paycheck in any market, the remainder of this post describes why a trader who uses Fibonacci ratios and patterns may have bought ESH14 (click for contract specifications) at this morning's lows (the yellow circle on the 240min chart), or several locations after. The following is a 30 minute chart where several visible swing points (see those yellow circles) are used to generate the prices of typical Fibonacci ratios that could serve as reversals:

What should be visible immediately is that 1832.3x is a price generated by two different swings at two different, typical Fibonacci ratios. Since ES futures trade in 0.25 point increments, you can round up or down, so 1832.25-1832.50 is the area of "confluence." As you can see, the candle that closed at 5:00a CT hit a low of 1832.75 (green box), which is close enough for me. Unfortunately, I was still asleep, so I needed to find a low risk entry into the trade. To find this entry, I opened smaller time frame charts, 987 and 144 ticks (987 and 144 are Fibonacci numbers, nothing magic about them, you would see a similar picture if you used 1000 and 250 ticks). The 144 tick chart is:

You can see price crossed the 50 period simple moving average (magenta line), the end points of that swing are labelled X and Y, the low at 1832.75 is one tick further than an exact 161.8A. This is a head and shoulders pattern where B will be between 78.6 and 112.8% (or more), C will range between 38.2 and 50% and the pattern will complete at the 161.8-224% extension of the XY swing. Those points are marked, the target of the 144 tick head and shoulders is in the yellow box. So, while missing the absolute low at 4:49am, a low risk C entry at a 50% retrace and equal in price to X (perfect for a head and shoulders) provided another entry at at 6:45am. Perhaps you still were not ready to trade or preferred to wait for the economic reports due at 8:30am CT, so the 987 tick chart provided another opportunity after the news:

The yellow box is the destination of the 144 tick chart, 161.8A pattern. Use the same idea on 987 tick chart as with the 144 tick chart. Find a swing across the 50MA, label the points XX and YY (these are different swings/prices than on 144 tick chart), then find that the low was also a 161.8 (more confluence). On the 987 tick chart, the points are labelled XX, YY, AA, BB, CC. Here too, a 50% CC was a potential trade opportunity at 8:53am and occurred after the 8:30am news releases. The destination of this 987 tick, 161A pattern is the 161.8 - 224 extension of the XX YY swing at 1852.5 - 1858.25. You can see that price hit the destination range and reversed.

Keeping in mind that this is a range bound market, let's zoom out to a 4181 tick chart and place a Fibonacci retrace from the all time high at 1856.75 and today's low as follows:

The bottom of the destination of the AA=161.8 pattern (1852.56) straddles the 78.6-88.7% retrace to the all time high. This is possibly a location for shorts to enter the market to keep it range bound. If they do not, or if they fail, then a 112.8% retrace, up to 1859.75 is possible.

If trading by pure Fibonacci ratios and patterns seems odd or magical, then consider looking at "off chart" indicators or other products that are somewhat correlated. Other products such as USDJPY (foreign exchange) or TY/ZN (ten year notes) are examples. Perhaps coincidence/correlation with those products making key swings will enhance your comfort in trading "the fibs."

See the trade, take the trade. I leave you with the following thought: