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Fifty-Percent Retracement Levels Can Provide Good Buying Opportunites10/17/02 11:48:06 AM
by Kevin Hopson
Fifty-percent retracement levels can offer good entry points for traders and investors. The November 2002 natural gas contract provides a good example of this.
|One of the most common tendencies in today's market is for prices to retrace half of the prior trend before resuming their original direction. This is known as the "50-percent retracement" rule. Since this occurs quite frequently in the market, investors and traders can use this method to determine more accurate and lower-risk entry points.|
|A good example of how this works on the long side is the November 2002 natural gas contract (NGX2). More specifically, November natural gas broke downtrend resistance at the $3.72 level back in August. As a result, the trend has been positive since then. This means that the upward trend should have continued after a 50-percent retracement of each significant rally.|
|Graphic provided by: SuperCharts.|
|To demonstrate, first look at August's breakout. Not only did November natural gas break downtrend resistance back in August, but the contract also made a significant run-up from its monthly low. For example, the contract bottomed out around the $3.06 level in August before breaking out and hitting a monthly high in the $3.92 to $3.94 range.|
|If you take the total distance of the move ($3.92 - $3.06 = $0.86), multiply it by .50 ($0.86 x .50 = $0.43) and subtract it from the breakout high ($3.92 - $0.43 = $3.49), the 50-percent retracement level comes in around $3.49. As you can see in the chart, November natural gas bounced off this level in September before resuming its upward trend. In other words, the 50-percent retracement level from August's low to August's high served as an excellent support level.|
|However, this was not a one-time event. For example, the 50-percent retracement level happened to be the low for September and natural gas proceeded up to the $4.18 to $4.20 range later that month. As a result, the next 50-percent retracement level - from August's low to September's high - came in around the $3.62 level. As you can see in the chart, November natural gas came just shy of hitting this level before turning up again. |
Kevin has been a technical analyst for roughly 10 years now. Previously, Kevin owned his own business and acted as a registered investment advisor, specializing in energy. He was also a freelance oil analyst for Orient Trading Co., a commodity futures trading firm in Japan. Kevin is currently a freelance writer.
|Glen Allen, VA|
|E-mail address: ||email@example.com |
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