the hAnDbook oF teChnICAl AnAlysIs
approaches point D. Standard bullish divergence on the MACD (as seen at
point X) coupled with the fact that point D is also finding support at a channel
line points to a potentially bullish scenario. At point D, the trader may exit all
or some positions in profit and subsequently reverse into a long position with
an initial stop positioned just below the 161.8 percent Fibonacci projection
level. Therefore we see the 161.8 percent Fibonacci projection level being used
in the first instance as a profit target, and subsequently as a point of entry for
the ensuing long position, with a stop placed below it. Again, finding a conflu-
ence of bullish indications at point D strengthens the case for a more reliable
price reversal forecast.
10.16 Fibonacci Two‐ and Three‐Leg Retracements
When applying Fibonacci retracements to adjacent or overlapping ranges we
must be careful to only draw Fibonacci levels for the most significant retracement
ranges. We shall employ a general rule for determining which ranges are the most
significant with the area of observations.
10.16.1 general rule for Drawing Fibonacci retracements
in adjacent or Overlapping ranges
As a general rule, if any preceding range engulfs all subsequent ranges within the
area of observation, the Fibonacci retracement of that preceding range is drawn.
The term engulf means that the range under consideration contains the highest
peak and lowest trough when compared to all subsequent ranges, while area of
observation extends from the beginning of the leftmost range up to the current
price. The practitioner should start from the leftmost range within an area of
observation and work through every range toward the right by checking if that
range engulfs all subsequent ranges that occur after it. If it does, the Fibonacci
retracement of that range is then drawn. This guideline will also allow for the
proper drawing of two‐ and three‐legged retracements, or any combinations of
multi‐leg formations. It is important to note that a price range is drawn from
peak to trough or trough to peak and never from peak to peak or trough to
trough.
Let us now first apply this simple rule to two‐ and three‐leg retracement for-
mations and subsequently extend it to complex or multi‐legged adjacent or over-
lapping formations.
10.16.2 Fibonacci two‐Leg retracement Formations
We have already dealt with single‐leg retracements. The retracement levels are
just the Fibonacci ratios measured across a single significant price range. In situ-
ations where we have two or more adjacent or overlapping ranges, care must be
taken to only draw Fibonacci retracement levels on price ranges that abide by
the general rule.
Figure 10.52 illustrates the various possible two‐range formations that a prac-
titioner may encounter in the markets.
