Notes on Retracement Theory in Markets
When the retracement of a rally is shallow, it indicates a stronger opinion of the shorter timeframe traders versus the opinion of the longer-term traders. Alternatively, if the longer time frame traders agree with the shorter timeframe traders (that the market is ultimately heading higher), they stand aside rather than fading the previous rally knowing that the 5-minute Bulls will exhaust themselves and prices will retrace. This is when they look to enter the market. If the price of com retraces less than 33% of the prior rally, then we could say that the 5-minute Bulls are stronger and/or the 15-minute traders agree with the shorter-term timeframe opinion. Should the Bears push the retracement to 50% or more, the 5-minute traders are probably being overpowered by a more powerful longer timeframe. Should the retracement be more than 66%, the traders in the shorter timeframe that caused the price movement would be in trouble When looking at a price chart, it is readily apparent th...