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RETRACEMENT


Fifty-Percent Retracement Levels Can Provide Good Buying Opportunites

10/17/02 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.

Security:   NGX2
Position:   Hold

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 Hopson

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: hopson_1@yahoo.com

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