Hello everyone, it’s been quite a week in the markets and things are starting to look a little bleak. However, I’m glad today because I chose to give my life to Jesus. If I lost every dollar, the world economy collapsed, I was out of work, or couldn’t afford basic items my future would still be secure. I hope today and everyday we are all able to remember that.
Now, as I’m looking at the S&P 500 in an attempt to understand which way the market winds may be blowing next week I’ve found myself reviewing the current fair value range. So, in today’s post I want to share with you a nice tool that I learned from “Sweet Bobby” on Youtube for finding the fair value range. Couple that with other indicators and you have a nice tool for understanding where the market is likely to go in the near term.
Let’s get into it.
Post Agenda
- Setting Up Fibonacci Drawing Tools on ThinkorSwim
- Drawing Fair Value Range Fibonacci Levels
- Interpreting the Fair Value Range Graph
- Final Thoughts
Setting Up Fibonacci Drawing Tools on ThinkorSwim
To begin, this isn’t going to be a masterclass on drawing these charts. I’ll leave that to “Sweet Bobby” since I’ve learned this technique from him. You can view his long-form video on Youtube titled, “Sweet Bobby draws Voodoo Charts”.
However, I couldn’t discuss the information these charts provide without a brief overview of how to apply them. As such, I’ll provide a quick walkthrough here of the steps I took to set up the ThinkorSwim platform. If you trade on another platform then you’ll need to confirm you have several different tools available.
You’ll need the following tools and the ability to adjust their values;
- Fibonacci Retracement Drawing Tool
- Fibonacci Extension Drawing Tool
- Monkey Bar Chart similar to the image below (found in > Style > Chart Mode)
Setting Up Fibonacci Retracement Drawing Tool
- Randomly draw a Fibonacci Retracement anywhere on the screen.
- Right click and select “edit properties”
- Change the values to match the image below
Setting Up the Fibonacci Extension Drawing Tool
- Randomly draw a Fibonacci Extension anywhere on the screen.
- Right click and select “edit properties”
- Change the values to match the image below
Drawing Fair Value Range Fibonacci Levels
With the tools set up the rest isn’t all to complicated but is cumbersome if you don’t know what you’re looking at. Again, I’m not going into great detail so if you’re interested please have a look at the video linked above.
- From the price chart select “style”, then “chart mode”, then “monkey bars”
- Draw a Fibonacci Retracement from the low to the high of the previous month
- Draw a Fibonacci Extension as follows
- First click at 50% line
- Second click at shaded green area
- Final click at the 100% line
- Note – If 50% line is above green area you’ll have to reverse that order, where the first click is at 100% line and final click is at the 50% line.
- Right click the Fibonacci Retracement and select “activate”, then drag the Fib Retracement graph so that the 0% line is in line with the Fib extension 200% line.
- Finally, grab the small blue square at the bottom of the Fib Retracement to adjust the size and drag to the first click at the 50% Fib Extension line. This should be noted by the angled drawing lines from the Fib Extension.
- After the Fib Retracement has been moved into place the Fib Extension can be deleted.
- Note – This is why “sweet bobby” calls this Voodoo. It’s just strange how this all works but since you’ll likely need to view more to understand this process, here’s a link to his Youtube video again.
Interpreting the Fair Value Range Graph
Finally, the reason for this post. As I was reviewing the portfolio today and comparing that with my current expectation for the market I found the fair value range graph incredibly helpful. Not only does it give me a sense of where the market may go but also removes frustration when developing a market hypothesis for my options trades.
Here is a graph of SPY with the fair value ranges highlighted in purple. One note however, price can and may fall outside of every range drawn here. If that happens before the month ends (and I draw a new set of ranges) I’ll simply duplicate the drawing and move the new Fib Retracement graph to where one of the 50% lines is in line with one of the old 50% lines. I realize that is as confusing as possible, so again, please watch “sweet bobby’s” video to understand further.
For starters I should say, it’s fully possible I’ve drawn these lines inaccurately. I didn’t invent this process so I’m really at a loss for how or why it works. That said, my assumption is if you watch some of “sweet bobby’s” newer videos you be able to see him draw this first hand. Either way, the ranges help provide some clarity and that’s all I’m really wanting.
Current Market Hypothesis
As it stands today, after the big pullup from the low of $549.68 we’re sitting very near a fair value. That in and of itself doesn’t help us much and is largely a neutral indication. Price could easily swing higher or lower from here. However, given that sentiment and uncertainty are relatively high across the market, lower would be my call at least for now.
If price does move lower, it will need to break the previous $549.68 low and the $548.60 (100% line) to move into the next fair value range. Additionally, I suggest a bearish sentiment because price only has to move through two levels to the downside to reach the next fair value range. And the 200 SMA has already been breached so there aren’t any psychological barriers to the downside from this chart.
For price to reach the next upside fair value range there are three levels in the way along with the 200 SMA. Not impossible but certainly not probable. Couple that thought process with the bearish sentiment and elevated volatility environment and the higher probability is that more downside is to come.
Finally, I’m ignoring that ridiculously large upward move from Friday until Monday. Once the Monday session closes we’ll know if this retracement from the downtrend is real or just another bounce that we’ve seen multiple times during this decline. Currently, I believe the later but Monday will answer that definitively.
Final Thoughts
Hopefully as you read through this post you weren’t immediately lost by drawing the graph. Truthfully, I didn’t even want to discuss how it’s drawn because it is quite the confusing process for a relatively simple graph. Still, once you fully understand the steps it will be second nature to you and easily drawn on any chart you prefer. I use it on almost every chart I’m analyzing just to get an idea of where price lies in terms of fair value.
I didn’t get into it in this post but I use the volume profile to help in my price discovery efforts. Currently, using this fair value range graph and volume profile I just can’t see any compelling reason why price isn’t going down to about the $540 dollar area. If it does, the S&P will officially be in correction territory and what comes after that is anyone’s guess. I don’t have data to support this but my gut tells me it isn’t often we move into correction territory and then immediately retrace out of it and on to new highs.
The final bonus to using a graph similar to this is with regard to overbought and oversold levels. Generally, traders like us look to the subgraphs such as Williams %R or Relative Strength Index (RSI) to determine overbought and oversold conditions. However, as I’m sure you’re aware those indicators can be difficult to draw conclusions from. Using them in conjunction with the fair value graph described here can offer validation to current overdone conditions.
Until the next post.
God bless,
Jeff
