Psychology behind retracement at resistance

I remember a few people asked me, why would a price retrace at key resistance areas, whether it is a fibonacci resistance, or a moving average resistance. Why can’t the price just break out?

Well, the price could break out. And what you would find thereafter is the price coming back down to test that level. The psychology behind a pullback (which is healthy as we wanna see a retracement forming a higher low) or a consolidation, is based on ‘humans remember prices’.

Take the past couple weeks as example. If you bought something while the STI is around 2200 and it plunged down to the 1900s and you didn’t sell then, and then the market rebounds back to test that 2200, what are you gonna do in this climate? I don’t know bout you, but my friends are taking the opportunity to dump shares and minimise exposure in the market. Are they silly, selling at a low? I do not think so cause I do not believe we are in anyway out of the woods. Every technical rebound is a selling opportunity. So back to the example where the STI re-tested 2200 yesterday but failed to close above it. On the charts below you would see we hit a fibonacci resistance. People who did not sell back then will take the chance to sell now and minimise exposure.  So odds are you get more sellers than buyers, where value buyers would not be interested in the prices on rebound. Result is a retracement. A healthy retracement has limited downside. Typically a 38.2% retracement is ideal.

The reverse is also true. Why are fibonacci supports there? They indicate levels where buyers would be waiting. Either on bargain hunting, or where people who missed the earlier opportunity to buy, will come in and support that level. How does fibonacci tell all that? Fibonacci is based on what’s natural in the world. Nature, symmetry and magical numbers. They are mathematically related and you can actually tell what the next digits will be just by following the pattern. And that is the key guys. Pattern. And humans, have, and always will have patterns.

These are fibonacci numbers, can you see how they are related? I know bummy will know.

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, …

And if you take the last digits of the series, you will also have a pattern. And this cycle will go on for 60 times before it is repeated.

0, 1, 1, 2, 3, 5, 8, 3, 1, 4, 5, 9, 4, 3, 7, 0, 7, …

And if you take the last 2 digits there will also be a pattern. This time it is 300 long.

Don’t worry too much bout these numbers. The idea is, price movement can be anticipated according to fibonacci levels. It does not tell you whether it will be an up day or down day tomorrow. But if the price is currently hitting a fibonacci resistance now, do you wanna buy? You could. But if the price tumbles then you are the sucker who bought right at the top. You will want to confirm a break of the resistance on the upside to be present before you go long. Your cut loss will now be supported by the resistance turn support fibonacci line, plus minus a few for whipsaws. You got plenty of upside (virtually unlimited) but limited downside to cut loss. That’s some thought for you guys.