DiNapoli Levels – Explanation And Example
Kent Shaw walks us through how to establish logical profit levels using DiNapoli's techniques.
Plotting Fibonacci Levels On A Stock Price Chart
Fibonacci levels (only the 38.2% and 61.8%) are calculated from the most recent swing high (or low) to ALL of the swing lows (or highs). In the case of AAPL below I went back THREE years (chart below is a weekly chart). In addition to swing lows, “thrusts” (large range bars where the open and the close are near the extremes of the range) should be included. In the case of an uptrend the low of the thrust is used. Downtrend are the opposite. Gaps should also be included with similar logic. I didn’t have time to mark the swing points but you can go to www.prophet.net choose Java Charts and look them up if you like.
Identifying Logical Profit Objective Using DiNapoli Analysis
DiNapoli also uses what he calls Logical Profit Objectives (LPOs) to calculated potential support and resistance levels. In the text box in the picture of my Excel spreadsheet on the next page you can see the calculations for the three LPOs: the objective point (OP), contracted objective point (COP), and expanded objective point (XOP). Any LPO or Fib level that has been penetrated by price should be eliminated from the analysis. Once the DiNapoli levels (i.e. all Fib levels and LPOs) are calculated. Look for “confluence” (K) or areas of agreement. This occurs where a 38.2% from one swing point is close to a 61.8% level from a different swing point or where either type of Fib level is close to an LPO.
The spreadsheet above has ellipses that are color coded to show various types of agreement or confluence (K). The blue shows the support levels calculated which include an XOP. The XOP and the 38.2% level calculated from the thrust of $15.30 are $33.76 and $33.93, respectively. Now for the fun part…..look at the low for AAPL that occurred two days ago in the chart below.
I prefer to combine these levels with other indicators (moving averages, an oscillator, and candlestick patterns) to confirm the likelihood of the level holding. In the chart above, most swing points occurred with candles that suggested a turn – long heads or tails.
The red ellipses in the spreadsheet show other areas of agreement where the current rally from the low should find resistance. There’s a Fib level and two LPOs in close proximity that range from $37.47 to $38.29. If I were a bettin’ man I’d probably look to enter a trade somewhere in front of or in the midst of that area with a stop with a stop in the midst of or on the other side of another area of confluence indicated in the spreadsheet (not marked) that exists between $40.46 and $40.94. That’s the essence of DiNapoli’s method. He also uses various indicators and patterns to enter trades that are interesting but I don’t have time to get into that tonight…. What I’ve covered here is the most powerful element of his book, in my opinion.
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