Price extension
A price extension is a method of obtaining targets for swings in the market. It is based on past moves and Fibonacci retracement levels and it allows investors and traders to extend the previous moves and identify the targets for potential next moves in the market. Price extensions can be used to analyze and make price predictions for many markets. For instance, when applied to gold, they can provide one with gold price predictions.
In a price extension, the usual course of action is to identify a recent move from one specific level to another and then to multiply it by one of the key factors (usually the various variations of the Phi number are used, but round numbers such as 2 or 3 are used as well). The underlying price move could be a move from a bottom to a top, from a top to a bottom, from a resistance level to a support level or the other way around, and so on.
Let’s take a look at a real-life example from the gold market.
Gold Price Extension
Imagine gold is in downtrend and after a temporary correction. If you expect the yellow metal to continue the trend down, you might be interested in how low it could go. Sometimes, important past tops and bottoms are far away or not applicable to the current situation. You could then use the magnitude of the most recent move down to get a bearing on how the next move down could potentially look like. An example of such an approach is shown on the chart below, where we see daily gold prices in 2018.
Gold Price Extension
First of all, let’s focus on the June move down. Gold depreciated from above $1,310 to below $1,240. Suppose you are after this move and you’re seeing a short-term rebound in the first week of July. At the same time, you still believe the trend is down and gold is to depreciate further. You could then set your reference points to the beginning of the June decline and the early-July rebound. We marked it with black and red, but for now please focus on the black version.
By measuring the move between these level you would get Fibonacci retracements (five horizontal black lines on the left) and a decline of roughly $70. Now, you could extend this decline by drawing further Fibonacci retracements. In this specific case, if you extended the retracements beyond 100% and drew the 161.8% retracement, you would get the $1,193 level (single horizontal black line below and to the right of the black Fibonacci retracements). This level could be interpreted as a target for a potential further move down following the early-July rebound.
Alternatively, knowing the specifics of the Phi number (1 / 0.618 = approximately 1.618) we can start using the Fibonacci retracement tool at the start of the price move (here: decline), and align the 61.8% Fibonacci retracement with the end of the move (here: bottom). The part of the Fibonacci retracement tool that is “supposed to be” the end of the move, will be the 1.618 Fibonacci price extension. That’s what we marked in red on the above chart. You can apply a similar technique to other retracements and you’ll get different price extensions. Applying the 50% retracement will provide you with a 1 / 0.5 = 200% extension. The 38.2% retracement will provide a 1/ 0.382 = approximately 2.618 Fibonacci extension.
Moving back to the above chart, we see that a move down occurred, which took gold to the price extension and beyond it. The bottom was not perfectly in line with the price extension but it might be tricky to expect gold to move exactly to this level. Sometimes the price extensions work on a very precise basis, but at times they work on a near-to-basis. Also, notice how exiting a short position in the proximity of the extension would have been a quite good idea as it would have shielded traders from a quite volatile rebound.
Naturally, depending on the market to which one applies the above technique, the price extension can be called according to the name of this market. When applied to the silver market, it would be a silver price extension, and in the case of miners, it would be a mining stocks price extension.