Fibonacci and Gann Applications in Financial Markets

Common Errors in Application of Fibonacci Retracements and Extension 71
Figure 5.10
the last bar, but if this is not followed by a successful break of the 23.6% retracement
level, which as we know is fairly minor in importance, there is a strong risk
that the recovery pattern will fail almost at the outset. Despite breaking channel
resistance in mid-October, there has not been significant upside momentum, which
suggests that the dominant bear move, which started at the August high, still has
influence. The succession of bear flags from the high add to this conviction, but the
most recent bear flag has failed as it is too long and too high. Remember that flags
really only work if the flag does not retrace one third of the ‘flagpole’, which is not
the case here. This contract is in danger.
Taking the next example of the Bund future in Figure 5.10, the contract is seen
in a notorious broadly sideways move since the initial bounce from the 61.8% support
level in December 2003. This is a weekly chart. It is not uncommon to see patterns
such as this during a working lifetime. The contract has not been able to
renew the dominant bearish move from the high and although the current action is
negative, support is looking fairly strong at the 50% and 61.8% retracement levels.
These levels have additional supportive evidence from congestion in the past and
will be difficult to cross. Looking at the price behaviour surrounding the bounce
from 61.8%, the contract has been in a bear channel, but saw the top of that taken
out very successfully in August 2002. This has put the reigns on the downtrend and
knocked some of the momentum out. The bounce site is not only retracement but
in the middle of some very strong congestion from the summer months and later in