Fibonacci Arcs are used to identify potential support, resistance or return points. As with the Fibonacci Retracements Tool, these return points assume the movement is corrective in nature. Withdrawal after an advance is considered a correction that will find support at the beginning of the advance. A bounce after a bearish is considered a counter-trend rally that will hit resistance below the start of the bearish. Fibonacci Arcs allows users to predict endpoints for these counter-trend moves. Like all annotation tools, Fibonacci Arcs does not mean an independent system. Just because prices approach a pedestrian, it doesn't mean they will reverse. Prices pass through these springs in most cases. No indicator is perfect. For this reason, the charts
Fibonacci Arcs add a time element to Fibonacci corrections. The Fibonacci Correction Tool is based on a vertical line from pit to hill or top to pit. It only concerns the change in price. In contrast, after a progression, a Baseline extends from the bottom to the top at an angle relative to the elapsed time (positive slope). After a fall, the Baseline extends from the top to the trench at an angle that also depends on the time elapsed (negative slope). The slope and length of the line depends on changes in both price and time. A large price move over a long period of time produces a long Outline with wide arcs. Conversely, a small price change in a short period of time produces a short Baseline with narrow springs.
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Chart 2 shows Home Depot with Fibonacci Corrections Tool and Fibonacci Arcs. Both indicators range from the low of July to the high of September. Notice how the Baseline slopes up and is longer than the vertical line in the Fibonacci Corrections Tool. While the Fibonacci Correction Tool shows static retracement levels, Fibonacci Arcs show dynamic retractions that develop over time. Fibonacci Springs retracted after a drop run slowly lower, indicating falling resistance zones. Fibonacci Arcs drawn after a advance slowly rise higher, denoting the rising support zones. Despite these differences, both tools are used to predict supports, resistances, and reversals.
Chart 3 shows Nvdia (NVDA) with two Fibonacci Arcs markup support. The first Fibonacci Arcs range from the low of February to the high of May. NVDA dropped quite sharply from early May, but reversed course between 50% and 62% springs. The second Fibonacci Arcs (pink) stretches from the low of May to the high of June. This progression is shorter, so Fibonacci Arcs are not that wide. NVDA dropped in late June and early July, but found support close to 62% post and rose sharply in mid-July.
Chart 4 shows Cleveland Cliffs (CLF) with an increase from March to May followed by a fluctuating retreat. The stock bounced from 38% release in mid-May and then bounced back from 62% release in early July. Even traders who missed this leap were given a second chance with the flag retracting and breaking in early September.
Chart 5 shows Darden Restaurants (DRI) with Fibonacci Arcs pulled from April's high to May's low. The stock recovered at the end of May and reached 62% air resistance in mid-June. After a few days of lingering, the stock fell sharply with a long black candlestick. Resistance in the 44-45 zone was confirmed by the May-June highs (orange box).
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Chart 6 shows the Fibonacci Arcs and Paychex (PAYX), which were pulled from May's high to July's low (2008). The stock recovered from mid-July to mid-August, but progress hit resistance at 62% publication. Also notice that a potentially rising wedge is formed. Although the stock moves out of 62% spread, the sideways move is not considered an uptrend. PAYX traded steady for several days, then broke its support to signal the May-June decline continued.
Expanding the Data Line
Kartists sometimes need to add extra time to see future support or resistance levels on the chart. Chart 7 shows the S&P 500 ETF (SPY) by adding 60 extra bars from mid-March to mid-July. With these additional bars, graphicists can see how springs will evolve in the future. This can be done by going to "chart properties" and entering the period number for the extension in the "extra bars" box.