Fibonacci Retracement
Fibonacci retracements identify price levels where corrective waves are likely to find support or resistance and reverse. The key levels are 23.6%, 38.2%, 50%, 61.8%, and 78.6%, derived from mathematical relationships within the Fibonacci sequence. You draw them from the start to the end of a completed wave to project where the correction might terminate. Wave 2 corrections typically retrace 50% to 61.8% of Wave 1, making the 61.8% level a prime area to look for long entries. Wave 4 corrections tend to be shallower, often finding support at the 23.6% or 38.2% retracement of Wave 3. The 78.6% level acts as the last line of defense. If a Wave 2 correction exceeds this level, the wave count is likely wrong. Retracement levels work best when combined with other evidence like prior support/resistance, trendlines, or Elliott Wave pattern completion signals. Don't use a single retracement level as a standalone trade trigger. Instead, watch for price to reach the level and then confirm a reversal with price action like a hammer candle, bullish engulfing pattern, or momentum divergence at that zone.
Microsoft completes Wave 1 from $300 to $400. You draw Fibonacci retracements and watch for Wave 2 to find support. Price pulls back to $338, which is exactly the 61.8% retracement level ($400 - $100 x 0.618 = $338.2). A bullish engulfing candle forms at $339, and Wave 3 launches from there.