Monday, January 21, 2008

Confluence and New Short Entries

So you are watching the collapse of the financial markets, the rising probability of recession, and a stock market staring disaster in the face. What to do?

Well first of all, if you are not short here, you should by no means get short now. You missed your chance on this leg. The good news is that, if this is a serious bear market, you will have many opportunities to get short again.

One of the best tools that I have found to pinpoint entry levels for short positions is Fibonacci confluence. The method is pretty simple and projects both short entry points and stop loss levels.

The charts below show three separate short entries predicted during the bear market of 2000-2002. Basically, one takes the Fibonacci retracement levels of two separate trends and look for their overlap, or confluence. See how nicely all three retracements stopped when they hit these levels. The uppermost retracement level acts as a stop loss. Some other examples can be found here.

Patience is the key here and don't forget to stay disciplined.

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