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The Shark Attack

System
by Ashwani Gujral

Reviewed and recommended by Indrajit Mukherjee

& www.stockmaniacs.net
 Introduction
Discovered long before there were stock markets, the Fibonacci method has proved to
be useful for traders.

One of the key goals of stock market traders is to find a way out of the maze of the
stock market. Toward this goal, traders have resorted to using astrology, rocket science,
fundamental analysis, technical analysis, and more to achieve this goal. The Fibonacci
method is one such attempt to unravel the mysteries of the stock market, in this case by
relating the market's movements to the Fibonacci series. Fibonacci series were iscovered
long before there were stock markets, but they relate amazingly well to the stock
markets and other natural phenomena.
Leonardo of Pisa, a 13th-century Italian mathematician better known by his nickname,
Fibonacci, is credited with the creation of the Fibonacci series. The series has its first two
numbers as zero and 1. You arrive at the remaining numbers by adding the previous two
numbers.
For example:
0+1=1
1+1=2
1+2=3
2+3=5
3+5=8
5+8=13
8+13=21
13+21=34
21+34=55
34+55=89 and so on.

Thus, we arrive at a series of numbers: zero,1,1,2,3,5,8,13,21, 34, 55, 89.

These numbers are related to each other by a ratio. Many phenomena in nature,
science, and astrology can be explained by using this property of the Fibonacci numbers.
Fibonacci numbers also have an interesting relationship with each other. Using the sums
from the examples above, we get 21/34 = 0.618; 34/55 = 0.618; 55/89 = 0.618.
Similarly, 34/21 = 1.618; 55/34 = 1.618, 89/55 = 1.618. This ratio is known as the
golden ratio and forms the basis of the Fibonacci methods in technical analysis.
The other two fractions, 0.382 and 0.5, most commonly used in technical analysis are
calculated as follows:
(1 - 0.618) = 0.382 and 0.5 is the mean of 0.382 and 0.618.
 FIBONACCI RETRACEMENTS

Fibonacci retracement tools are conveniently available in most software packages. To

use it, we must:
Identify a swing high and a swing low in the price action.
Generally, use the 38.2%, 50%, and 61.8% values (Figures 1 and 2). If those values
do not hold, 25% and 75% can also be used.
Look for supporting evidence along with Fibonacci retracements, such as extreme
values in short-term relative strength index (RSI) or stochastics, or confluence of
Fibonacci levels across time frames.
Focus on regions of support and resistance.
In very strong bull and bear markets, look for prices that often do not retrace more
than 25-38.2%. In moderately bullish and bearish markets, prices can retrace up to 50-
61.8%.
Finally, keep an eye out if prices start breaking the 61.8% to 75% retracement. If this
happens, the main trend may be under threat.

Figure 1: Fibonacci retracements in an uptrend

 Figure 2: Fibonacci retracements in a downtrend

Figures 3 and 4 display examples of Fibonacci retracement levels in upswings and

downswings.

Figure 3: Fibonacci retracement levels in an upswing

 Figure 4: Fibonacci retracement levels in a downswing

CONFLUENCE OF FIBONACCI LEVELS

With almost five Fibonacci levels to contend with, traders can often be confused. They
are often left wondering which of the levels might most likely hold. In such cases,
The confluence of two Fibonacci levels measured from two different swing lows to the
same swing high in an upswing is considered the most significant support level.
On the other hand, the confluence of two Fibonacci levels measured from two different
swing highs to the same swing low is considered to be the most significant resistance
level.
When the stock gets close to a confluence level, traders should look for supporting
evidence in order to act. Fibonacci levels like other indicators cannot be acted on in
isolation.
The 60-minute chart of the Nasdaq composite in Figure 5 shows the confluence of
levels at 2115, which acts as a strong support.
 Figure 5: Nasdaq composite 60-minute chart

SHARK ATTACK
Now, here's a strategy using the Fibonacci levels. The shark attack strategy details
how retail traders are learning conventional, predictable theories in technical analysis and
are not doing themselves any good. Haven't you seen it happen?
Think of it. Whenever you position yourself for what you believe is a sure traditional
setup, smart traders and institutions come in and move the market sharply in the
opposite direction, coming in for the kill, much the way sharks do instinctively. In this,
the shark attack is similar to the turtle soup strategy made popular by Larry Connors and
Linda Bradford Raschke in their book, Street Smarts. That strategy is another example
of how smart traders and institutions take advantage of retail traders using traditional
setups who become trapped on the other side of the trade.
If you become aware of how the shark attack strategy works, you can avoid the
consequences. Here's how the shark attack strategy can be used with Fibonacci levels for
both short trades and long trades:
 Conditions for the short trade (Figures 6 and 7)
Assume the market is in an upswing and forms a swing high point 1, retracing
normally to point 2. I wait for the market to test the previous top. Two possibilities arise:
1 The market forms a double top and comes down sharply.
2 The market breaks the previous top and continues to rally to point 3.

Figure 6: Short trade shark attack

Figure 7: Short trade shark attack

The third possibility is the shark attack that is, the market breaks its previous top and
rallies between 1.272 and 1.618 of the previous correction, which is point 3, and retail
traders go long with it.
After this, a sharp decline takes place, taking the market down to at least 1.272 of the
last rally. At that point, pressured retail traders scamper away, and should prepare for
shark attacks whenever traders act in a bullish or bearish consensus, expecting a
breakdown or breakout.
The short trade can be taken when the low of the previous bar is broken and the
second higher high can be used as the stop-loss. The profits on the short side can be
1.272 times the difference of point 3 and point 2.
Conditions for the long trade (Figures 8 and 9)

The converse is true for the long trade. Assume the market is in adownswing and
makes a swing low at point 1, and retraces upward to point 2. You should wait for the
market to test the previous bottom. The market could either form a double bottom and
rally sharply or break the previous bottom and continue to decline to point 3.

Figure 8: Long trade shark attack

 Figure 9: Long trade shark attack

Once again, another possibility is the shark attack, which occurs when the market
breaks its previous bottom and declines to about 1.272 and 1.618 of the previous
correction (point 3), making retail traders go short with it. After this a sharp rally takes
place, taking the market up to at least 1.272 of the last correction, as once again,
pressured retail traders scamper away and cover their short positions.
The long trade can be taken when the high of the previous bar is broken and the
second lower low can be used as the stop-loss.
In both the long and short trades, traders must tread with caution on the simple
breakout/breakdown trades and should be ready for shark attacks whenever retail
traders act in a bullish or bearish consensus expecting a breakdown or breakout.

Thank you.

If you have any questions, please feel free to ask our support team by sending an E-
mail to: stockmaniacs@ymail.com
We will do our best to help you.

Yours,
Indrajit Mukherjee & www.stockmaniacs.net.

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