According to Dow Theory,
in a bull market we see a succession of higher highs and higher
lows due to an upward change in expectations and the resulting supply
and demand for a stock. Prices, however, have a tendency to retreat
after one of these higher highs, this reversal being known as percent
retracement (the percentage value that prices retraced from
the high to the low). Day trading experts may combine this methodology
with Fibonacci retracements in order to make predictions of where
intraday moves may falter, but it is a highly subjective process,
requiring large qualtities of trading experience to implement properly.
For example, if a stock
moves from a low of 500 to a high of 1000 and then retraces to 750,
the move from 1000 to 750 retraced 50% of the original move. This
obviously dovetails in nicely with Fibonacci Levels, and has provided
many a trader with a platform upon which to base his custom trading
system, with retracements of up to 33% and 50% being common, while
more than 66% probably means the bull move is over. (Note - the
Fibonacci levels are 38.2%, 50%, and 61.8%).
For a bear market, the
inverse is said to be true.