A retracement is a significant price adjustment of an existing trend. Traders commonly focus on Fibonacci retracements, and the three main levels are 38 percent, 50 percent and 62 percent of a prior move. I’m not going to get into all the complexities of Fibonacci analysis just know what these levels are, and what price points coincide with them in the market you are trading. They are key levels that act as a gravitational pull.

A two-day close through one retracement level can signal the markets next move could likely be to the next retracement level. When a market closes below the 38 percent retracement for two days, well often see a quick move down to the 50 percent level, because so many professional traders are watching, and trading based on these levels. Participants may also try to defend these levels for as long as possible to minimize their losses on positions.

Looking at the crude oil again, I will add the Fibonacci retracements to the chart. You can see the move up from low at about $26.00 in February 2016 to the high at about $77.00 in October 2018 creating your Fibonacci range. After mapping the retracements, you can see how important the 38% retracement held initial support. As a trader, you would want to watch for a two-day close below the 38 percent retracement level (which comes in around $58.00). If this occurs, the market is likely to head lower and could push down to 50 percent retracement near $51.50

Crude Oil Daily Chart