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Overview
A characteristic of a healthy bull market is that it makes higher-highs and higher-lows.
This indicates a continual upward shift in expectations and the supply/demand lines. The
amount that prices retreat following a higher-high can be measured using a technique
referred to as "percent retracement." This measures the percentage that prices "retraced"
from the high to the low.
For example, if a stock moves from a low of 50 to a high of 100 and then retraces to 75,
the move from 100 to 75 (25 points) retraced 50% of the original move from 50 to 100.
Interpretation
Measuring the percent retracement can be helpful when determining the price levels at which
prices will reverse and continue upward. During a vigorous bull market, prices often
retrace up to 33% of the original move. It is not uncommon for prices to retrace up to
50%. Retracements of more than 66% almost always signify an end to the bull market.
Some investors feel that the similarities between 33%, 50%, and 66% and the Fibonacci
numbers of 38.2%, 50%, and 61.8% are significant. These investors will use
Fibonacci Levels to view retracement levels.
Example
I labeled the following chart of Great
Western at three points (labeled "A," "B," and "C").
These points define the price before
the price move ("A"), at the end of the price move ("B"), and at the retraced price ("C").
In this example, prices have retraced 61.5% of the original price move.
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