For a 38.2% retracement level, the guidelines are:
- If price holds at the 38.2% retracement level, the prior move is considered to be strong. As a result, the counter move should be strong.
- A 38.2% retracement after a strong advance typically is followed by a move to a new high.
- A 38.2% retracement after a strong decline typically is followed by a move to a new low.
For a 61.8% retracement level, the guidelines are:
- If a stock experiences a 61.8% retracement, the prior move is considered weak (or near its end). As a result, the counter move should be weak.
- A 61.8% retracement after a strong advance often leads to a move with a one-in-three chance of exceeding the prior high. The same also applies in reverse.
- The first retracement after a strong up move is considered a buy most of the time, but you need to consider exiting a trade as price nears its previous high or low.
These guidelines act as a safeguard to keep your own emotions under control to prevent any euphoric anticipation of a runaway move or sense of overwhelming fear of a losing trade (see “S&P reversal,” below). Keeping your personal expectations in check will preserve your objectivity and prevent you from projecting those feelings into your trading.