Fibonacci retracements ratios are often used to identify the end of a correction or a counter-trend bounce. Most reversals happen between 38.2 and 61.8 since this covers the larger part of the volatility range and is closest to the stock’s average price and momentum.
Think of Fibonacci retracement ratios like the presto-logs from Back to the Future III. And just in case you don’t know what a presto-log is, here is a quick overview on it’s origin. It was an artificial fuel for wood burning stoves developed in the 1930’s as a means of recycling the sawdust from sawmills. So in Back to the Future, Dr. Emmett Brown created his own. In his adaptation, each log would burn hotter based on color; green being the coolest and least volatile and red being the hottest and most volatile.
Well in Arbitrage, Fibonacci retracement ratios are used as a way to illustrate support and resistance within the Omega™ Indicator. So as volatility increases and decreases, these lines help to mark subtle changes in speed and volatility.
Pro Tip: Down happens fast and is at the bottom of the Omega Range and up happens slowly and is near the top.
As an buy trend progresses volatility and momentum eventually reaches 0 and the equity tops. Likewise when a downtrend begins it accelerates until it reaches terminal velocity and then begins to slow down because it is not maintainable.
Enjoy, Arbitrage Trade
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updated to version 5 of the pine editor language and added cross time frame analytics.