dougSF30, followup on 50% retracement hypothesis -
The aforementioned book presents the percentage retracements as an observation of market behavior, and does not give an explanation of why. There are variations of this rule which give slightly different retracement numbers, but I like to work with simple rules (especially since the variations don't change the numbers much).
The 50% retracement rule basically says that a trend (either up or down) will tend to retrace about half its previous movement, with additional percentage parameters at the 1/3 and 2/3 mark. As I said, this is claimed to be observed behavior of the market. I will do a followup post with the generic psychological underpinnings of this stuff.
A variation of this method is the Gann method which claims that there are actually eight evenly spaced percentage parameters in a trend retracement. Three of these are major parameters - 3/8, 4/8 and 5/8, which corresponds to 38%, 50% and 62%. The other five points are less significant for support and resistance. The book acknowleges that these points are approximate, and you can combine both methods to make a parameter range (33-38%, 50%, 62-67%).
If a retracement goes past the largest parameter (62% for Gann or 67% for the older method) then it is considered more likely that the trend has reversed and the retracement will continue for at least 100%. Once again, no magic to all of this. Simply that if a trend retracement does not hold at the 2/3 point then the market is telling us that the fundamentals have reversed for this security. It goes back to the fundamental believe among chartists that the market as a whole knows more than you or I.
