On the chart below, I have further noted the fib levels that I and my systems like to watch. The 1.128 and 1.272 extensions are major test points for people psychologically, because they pray upon the emotions that people have when they think they have got it wrong. At these extensions people think we are going much lower or much higher (depending on the direction we come into them) and tend to capitulate, go to their local bar for drinks and or start shopping for hookers in the village voice. The irony is also at these levels other market participants are absolutely sure they have it right and a absurdly relaxed taking what they believe to be their high probability breakout trade. This is why breakouts fail most of the time. Breakout trading is very difficult to be successful with unless you have something more substantial influencing your decision than a simple trend line break.
These fibs are called derivatives because they are square roots or derived values of the natural fibs. There are some others that I watch as well for example 80.9. I do not look at these numbers for 100% dead nut precision, though their accuracy is uncanny, but what they really do is increase the odds one way or another for the trade probabilities.
As you can see from the current setup we are about to test the shorts balance of capitulation versus desire for alcohol and hookers. 655 is the level on the TF. Probability favors that we should reverse hard around those levels and I will be watching closely. TF has a tendency to overshoot so I would view that as a good opportunity. For the SP500 the levels are between 1106 and 1112. So that is a zone. Think of it that way. We may stop exactly at 1112 or 1106 but we could also shoot up to 1118 or 1120...still probabilities favor the contrarian. The funny thing is to watch how people behave around these levels. You should see bloggers and analysts totally reverse their view and take losses just as we did at the recent lows.
Its all very interesting and our game is not to be perfect just probabilistic. I would like to point out also that in the chart below that is most definitely NOT a good inverse head and shoulders. It is deformed and therefore less probable. First swing high did not take out previous swing high resistance and the retest broke the left shoulder lows...these are both signs of weakness in the pattern.
