While there are exceptions to this rule, we look for the corresponding 1.272 as a swing target, when a .786 retracement level is broken. This makes .786 a formidable resistance area when an uptrend is forming, since extending to the target usually involves breaking swing highs prior to the major low in the downtrend, thereby shifting the pattern back to upside. If a market isn't ready to commit to this, the .786 retracement will hold.
On the daily S&P cash chart below, you can see that the price held firm at the .786 retracement of the January 28th high to the March 6th low. Had it broken, we would have been looking for the extension target at 935; as mentioned above this would have been a significant pattern shift.
We use the CCI (Commodity Channel Index) as a momentum indicator to show us which price levels are more likely to hold, and which should be due for a break. Note that on this decline, the 50 period CCI hasn't broken below the zero line. That's very similar to price holding above a daily 50 period simple moving average.
From here we can step down to a shorter timeframe chart, like the 45 minute chart of the ES (mini S&P futures contract) seen below.
Yesterday morning price opened below the .786 retracement taken from last Wednesday's low to Thursday's high which had been in the 796 area. On an intraday basis we knew to look for the downside target extension at 775.25. This level also coincided with a slightly longer term .786 support retracement and the overlap provided reinforcement. Added to this, you'll note the histogram immediately below the price area of the chart. This indicator is generated by counting the number of bars between prior pivots and multiplying by specifically chosen Fibonacci ratios. It indicated that the maximum probability for another pivot would come in towards the end of the trading day. Since price reached the target and other overlapping strong support during that 45 minute timing window, we were looking for a hold there.
So what's next? There's still significant time and price resistance on the 45 minute chart. Pre market shows that we're likely to open with a break of the closest resistance. There are some minor timing indications for a possible high early in the session, and if this doesn't result in a deeper downside move it may at least bring a pause. But the more important resistance is higher up. For this rally to continue on the longer term charts, we'll need to see a clear break of the .618 and .786 resistance levels. Sounds obvious I know, but the point is that a break of the .786 resistance at 818.50 would imply reaching the swing target at 845. This would also break the daily resistance discussed earlier. So if this market is going to hold back from a significant shift in pattern, we'll see a hold at the major resistance on this 45 minute chart. While we may not see those levels today, we'll still have to keep an eye on them. And there's more significant timing for a high as we approach the last 45 minutes of today's session. Any resistance levels will become amplified in strength then if we're rallying into them.