ETFdb Logo
ETFdb Logo
  • ETF Database
  • Channels
    • Active ETF
    • Alternatives
    • Beyond Basic Beta
    • China Insights
    • Climate Insights
    • Commodities
    • Core Strategies
    • Crypto
    • Disruptive Technology
    • Dividend
    • Dual Impact
    • Emerging Markets
    • Energy Infrastructure
    • ESG
    • ETF Building Blocks
    • ETF Education
    • ETF Strategist
    • Fixed Income
    • Free Cash Flow
    • Future ETFs
    • Global Diversification
    • Gold/Silver/Critical Minerals
    • Innovative ETFs
    • Institutional Income Strategies
    • Leveraged & Inverse
    • Managed Futures
    • Market Insights
    • Megatrends
    • Modern Alpha
    • Multi-Asset
    • Night Effect
    • Portfolio Strategies
    • Retirement Income
    • Richard Bernstein Advisors
    • Tax Efficient Income
    • Thematic Investing
    • Volatility Resource
  • Tools
    • ETF Screener
    • ETF Country Exposure Tool
    • ETF Sector Tracker Tool
    • ETF Database Categories
    • Head-To-Head ETF Comparison Tool
    • ETF Stock Exposure Tool
    • ETF Issuer Fund Flows
    • Indexes
    • Mutual Fund To ETF Converter
    • ETF Data for Journalists
    • ETF Nerds
  • Research
    • First Bitcoin ETF
    • ETF Education
    • Equity Investing
    • Dividend ETFs
    • Leveraged ETFs
    • Inverse ETFs
    • Index Education
    • Index Insights
    • Top ETF Sectors
    • Top ETF Issuers
    • Top ETF Industries
  • Webcasts
  • Themes
    • AI ETFs
    • Blockchain ETFs
    • See all Thematic Investing ETF themes
    • ESG Investing
    • Marijuana ETFs
  • Multimedia
    • ETF 360 Video Series
    • ETF Trends on Videos
    • ETF Trends on Podcasts
    • ETF Prime Podcast
  • Company
    • About Us
    • Swag Store
  • PRO
    • Pro Content
    • Pro Tools
    • Advanced
    • FAQ
    • Pricing
    • Free Sign Up
    • Login
  1. ETF Trading Strategies
  2. Fibonacci Extensions: How to Find Turning Points
ETF Trading Strategies
Share

Fibonacci Extensions: How to Find Turning Points

Cory MitchellJun 24, 2015
2015-06-24

With ETFs available for almost every financial niche imaginable, more and more traders are looking to technical analysis tools to help them trade the ETF universe. The Fibonacci Extension tool is available on most trading platforms and can help ETF traders establish profit targets and isolate potential price reversal areas. Like any indicator, it shouldn’t be used in isolation, but is a valuable tool for providing an overall context of where an ETF may be going

Fibonacci Extension Tool

Analyzing data on the computer

There is often a mathematical relationship between one price wave and the waves that follow it. This relationship is based on the “golden ratio” and related Fibonacci numbers found throughout the natural world including in galaxy formations, plant growth and even man-made financial markets. The Fibonacci Extension indicator plots the most common mathematical relationships, producing a predictive technical indicator [see How To Swing Trade ETFs].

The Fibonacci Extension tool is drawn over one wave of prices to provide estimates on where the next price wave will go. The most watched Fibonacci extension levels are: 61.8%, 100%, 138.2%, 161.8%, 200%, 238.2%, 261.8%

The tool utilizes three price points. In an uptrend , the first point is placed at the former swing low, the second point at the recent swing high, and the third point goes at the most recent swing low. The recent swing low may need to be adjusted several times in real time until the price begins to move higher and the low is established.

The tool then plots the levels based on the prices used. Notice how the SPDR S&P 500 (SPY A) comes very close to the 61.8% level in Figure 1. and then begins a pullback. In this case, a profit target could have been placed at 61.8% to avoid holding through another pullback [see ETF Technical Trading FAQ].


Content continues below advertisement

SPY line chart fibonacci
Figure 1. SPDR S&P 500 with Fibonacci Extension Tool. Click to enlarge.

By default, most trading platforms show additional Fibonacci Extension levels, such as 78.6% and 178.6%. Investors may opt to keep these levels, as the price will occasionally stall, but the chart will become cluttered. Add Fibonacci levels, or delete less important Fibonacci levels, by entering the tool’s properties, making the adjustments, and then saving the changes made.

Interpreting Fibonacci Extensions

Typically, the price of an ETF will move to one of the extension levels, and then experience a consolidation or pullback. A pullback doesn’t indicate an overall trend reversal, just that a short-term consolidation or move against the trend is occurring. Only price and trend analysis can determine if the trend is reversing, as explained here: How to Take Profits and Cut Losses When Trading ETFs.

The Fibonacci area where the price stops will depend on the strength of the trend. During a weak uptrend, the price will barely make it past the former high, and is likely to stop near the 61.8% or 100% level. If the trend is very strong and surging past the former high, it’s more likely to run to the 161.8% or even 200% level.

Once a reversal occurs, another Fibonacci Extension tool can be drawn to project the next price wave. Figure 2. is the same chart as Figure 1., except a Fibonacci tool has been applied to the wave prior as well.

SPY line chart fibonacci 2
Figure 2. SPDR S&P 500 with Two Fibonacci Extensions. Click to enlarge.

Notice how the first wave drawn respects the 100% level, and the latter wave respects its own 61.8% level and the 100% level of the former wave. When two Fibonacci levels from different waves are very close to each other, it’s called a cluster, and is likely to be an important area [see 5 Most Important Chart Patterns For ETF Traders].

Figure 3. shows the Fibonacci Extension tool applied to a downtrend in the ProShares Short Russell 2000 (RWM A-). The price consolidates or pulls back when it reaches a Fibonacci cluster – price areas where two or more Fibonacci Extension levels occur.

RXM line chart fibonacci
Figure 3. Proshares Short Russell 2000 with Fibonacci Extension Clusters. Click to enlarge.

If the chart becomes too cluttered, delete older Fibonacci Extension levels that occurred more than two waves ago.

Ideally, Fibonacci Extensions are used to trade with the trend, with the levels used as potential exit points or to indicate where a consolidation or pullback is likely to occur. Avoid trading against the trend, assuming these levels will stop it. For example, during a downtrend, such as in Figure 3., going long at one of the Fibonacci levels expecting a move higher is a low-probability trade. There is no assurance the price will stop at a Fibonacci level and reverse. The price could also very well continue to run through one level toward the next [see 17 ETFs For Day Traders].

The Bottom Line

Fibonacci Extensions can be applied to any time frame, from monthly charts down to one-minute charts. Apply the tool to price waves in order to project where future price waves could go, and recognize that clusters of Fibonacci levels indicate a price area that is especially significant. Most importantly, investors need to remember that there is no assurance the price will make it to a target level or that the price will stop there. Therefore, it would be most prudent not to rely on the Fibonacci Extensions in isolation, but rather as part of a complete trading plan.

[For more ETF analysis, make sure to sign up for our free ETF newsletter or try a free 14-day trial to ETF Database Pro]

Disclosure: No positions at time of writing.

» Popular Pages

  • Tickers
  • Articles

Feb 03

Main Management Market Note: February 3, 2023

Feb 03

SPYI, a High-Income ETF Within Equities, Up 10%

Feb 03

Navigating Exchange FOMO for Advisors

Feb 03

In 2022, Main Supply of EU Electricity Was Renewable

Feb 03

VettaFi’s ETF Rising Stars: January 2023

Feb 03

Big Tech Is No Longer Certain; Consider Active

Feb 03

Equal-Weight Cloud Computing ETF WCLD Hits Buy Signal

Feb 03

American Century's KORP, VALQ Hit 5-Year Mark

Feb 03

Bitcoin Opens 2023 Strong, Outperforms Bonds

Feb 03

These 2 ETFs Show Growth Is Back in Style

QQQ

Invesco QQQ Trust

SPY

SPDR S&P 500 ETF Trust

VOO

Vanguard S&P 500 ETF

VGT

Vanguard Information...

SMH

VanEck Semiconductor ETF

XLK

Technology Select Sector SPDR...

VTI

Vanguard Total Stock Market...

SOXX

iShares Semiconductor ETF

BLOK

Amplify Transformational Data...

META

Roundhill Ball Metaverse ETF

Loading Articles...
Help & Info
  • Contact Us
Tools
  • ETF Screener
  • ETF Analyzer
  • Mutual Fund to ETF Converter
  • Head-To-Head ETF Comparison
  • ETF Country Exposure Tool
  • ETF Stock Exposure Tool
  • ETF Performance Visualizer
  • ETF Database Model Portfolios
  • ETF Database Realtime Ratings
  • ETF Database Pro
More Tools
  • ETF Launch Center
  • Financial Advisor & RIA Center
  • ETF Database RSS Feed
Explore ETFs
  • ETF News
  • ETF Picks of the Month
  • ETF Category Reports
  • Premium Articles
  • Alphabetical Listing of ETFs
  • Best ETFs
  • Browse ETFs by ETF Database Category
  • Browse ETFs by Index
  • Browse ETFs by Issuer
  • Compare ETFs
Legal
  • Terms of Use and Privacy Policy
  • © 2023 VettaFi LLC. All rights reserved.
Follow ETF Database
Follow ETF Database

Advertisement

Is Your Portfolio Positioned With Enough Global Exposure?

ETF Education Channel

How to Allocate Commodities in Portfolios

Tom LydonApr 26, 2022
2022-04-26

A long-running debate in asset allocation circles is how much of a portfolio an investor should...

Core Strategies Channel

Why ETFs Experience Limit Up/Down Protections

Karrie GordonMay 13, 2022
2022-05-13

In a digital age where information moves in milliseconds and millions of participants can transact...

}
X