Western Sierra Resource Corp. (WSRC) was one of the biggest gainers on Tuesday, up over 800%.

But it wasn’t done moving yet. After a significant pullback on Wednesday, the stock was back on the biggest gainers list Thursday.

When a stock is up nearly 10x in one day, it can be hard to see the trade potential. So, what levels can I possibly use for support at this point?

To answer that question I turn to one of my favorite tools for this one…Fibonacci Retracements.

Using the Fibonacci Retracement levels, I was able to find a potential entry for WSRC and added it to my midday watchlist on Thursday…just before the next move up.

Fibonacci Retracements

A Fibonacci retracement is a tool used in technical analysis that refers to areas of support or resistance.. Each level is associated with a percentage…

The percentage is how much of a prior move the price has retraced. The Fibonacci levels are 23.6%, 38.2%, 61.8% and 78.6%…. and while not officially a Fibonacci ratio, 50% is also used.

Fibonacci retracements can be used in many ways… In the most basic terms, this tool is used to determine support and resistance levels or inflection points where some price action is expected, either a rejection or a break.

So they can be useful for trade entries, stop loss levels, price targets, etc.

The indicator tool is easy to use … I draw a line between any two significant price points, such as a high and low trend…

Then the tool will create the Fibonacci percentage levels (support and resistance) between those two points.

For example, if I am watching a stock previously in an uptrend, but now making a pull back… I might be watching for one of my setups to get me in on a continuation of the uptrend…

Using the Fibonacci tool, I can draw a line from the low of the trend to the high and the tool will place the retracement levels on the chart.

Now I have a view of potential support levels that other traders are looking at as well.

Here’s a stock that was on my watchlist Wednesday using Fibonacci Levels to eye a potential trade:

Western Sierra Resource Corp. (WSRC):

WSRC must hold over $.11 for me to remain on the list. I say $.11 for educational lessons because that is the 62% retracement using Fibonacci here from $.022 level to $.255 high the other day.

Moving back up the retracement areas, $.17 would be a key breaking spot at the 38% level. My trade plan is ONLY to trade on WSRC if it breaks $.17, which is again the 38% retracement back up. Then my target would below $.20s and a stop at the 50% retracement back down at $.14

Using Fibonacci Retracements on WSRC

When I watched the insane move on WSRC Tuesday, there wasn’t much I could do with it right there.

You can see the stock blasted off, going from .0265 – .255. I’m no dummy…so you’re not gonna catch me chasing a stock that’s up nearly 10x in a day.

But when WSRC started to pull back on Wednesday, I started watching for support and the potential of a continuation…

The problem was where to find support when a stock is up in the atmosphere.

Using the Fibonacci tool, I drew a line from the start of the move on Monday to the high on Tuesday…and the tool placed the retracement levels on the chart (orange lines on chart).

Then I just watched to see how WSRC reacted at each Fib level.

Looking at the chart below, WSRC pulled back hard on Wednesday nearing the 61.8% Fib level.

Being the last level on the retracement, if a stock breaks the 61.8% it’s pretty much failed the trend and time to start over.

So when WSRC was testing this level on Wednesday I knew it was important to watch closely.

Was I going to see it break through and fully retrace the move…or would it hold and continue the move up?

There’s no way to know this ahead of time. The key is looking at all the information and making an informed decision.

As mentioned in my watchlist above…I needed to see WSRC hold the 61.8% Fib level and then I would look to enter as it climbs back through the 38.2% level.

Here’s what happened next…

The beauty of the Fibonacci levels is that, unlike many other indicators, they are fixed… so no recalculating or moving your objective during the trade.

So I knew I was looking at an entry above .17 which was the 38.2% level, after the stock held the 61.8% level at .11.

Here’s a look at the 5 minute intraday chart to see how it all played out in more detail…

The first move-up was on Tuesday. It then gave back a significant portion of the move Wednesday, when I started eyeing the Fibonacci retracements levels (orange lines).

Thursday morning the stock made a move to test the 61.8% level (.11). After holding that important level, I added it to my afternoon watchlist.

After which, WSRC reclaimed the VWAP (learn about that here) and from there it broke the 38.2% level (.17) for the potential entry point off my watchlist

The Bottom Line

Fibonacci retracements are among the most popular technical analysis tools with origins in the Fibonacci numbers which can be seen in everything from shells to flower petals.

Technical analysis is more art than science, so you should always use multiple tools with the Fibonacci retracements.

And it takes practice so before you go out there and start trading using this indicator, practice spotting how different stocks react at each level in different environments.

There are no absolutes.