Bozur
Amicus
Posts: 5,515
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Post by Bozur on May 29, 2008 0:46:26 GMT -5
Identifying Potential Highs & Lows
Guy Halpin, Optionetics.com.au May 27, 2008
Having the ability to forecast significant tops and bottoms is the ultimate level of achievement for any trader. This is not as easy as it seems. We have all been in the boat of entering a bullish trade at a top or a bearish trade at a bottom. After all, it is natural human behaviour and this is exactly how the average uneducated person trades. As Optionetics students we are operating on a higher level. We are taught to be momentum traders. As the adage goes, "the trend is your friend." However, there are times to sit back and not trade, as a turn may be close by. In this article I wish to show you how the recent March low occurred at a key price level using the ‘numbers of nature’ (aka Fibonacci numbers).
As technical traders we are convinced that history repeats. The market, sectors and individual stocks all trade in patterns and ratios that have been seen in the past. The key Fibonacci numbers to watch are 23.6%, 38.2%, 61.8%, 100%, 138.2% and 161.8%. Unfortunately, going into the derivation of these numbers is beyond the scope of this article. If you would like to learn more about them there are several articles in the Optionetics archives, or you can do a search through your Web browser.
I will focus on the S&P500 (SPX) because I believe this is the best index to get an overall feel of what is going on in the US market. Figure 1, below, illustrates a monthly bar chart applying the Fibonacci retracement drawing tool from ProfitSource. The tool is applied from the 1987 low of 216.46 to the 2000 high of 1552.87 and with each of the Fibonacci levels. It can be seen that the key level of 61.8% retracement level (726.97) held in 2002.
Figure 1: SPX monthly bar chart with the Fibonacci drawing tool
After there is confirmation that this has the potential to be a significant low, then it is time to get an idea of where areas of resistance could be. To do this we need to apply the Wave Extension drawing tool in ProfitSource. Figure 2 shows this tool being applied. Notice how the 61.8% extension level held and the market pulled up just short of this level? So too the retracement down held above the 61.8% level yet the extension held below the 61.8% level. Seems like the Fibonacci levels with 61.8 in them are important!
Figure 2: SPX monthly bar chart with the Wave Extension drawing tool
This is all good and well in hindsight, but how is this relevant to today’s market? Before answering that question, as a technical trader you must first understand that what works on a yearly chart will work on monthly, weekly, daily, hourly, and 5-minute charts. In Figure 3, below, the Wave Extension drawing tool has been applied to a daily bar chart. The 1.618 extension is clearly at work on two separate ranges. I will focus on the larger one (green lines). The market breached the 1.618 extension briefly intraday on March 17 before closing well off this level.
Figure 3: SPX daily bar chart with the Wave Extension drawing tool
Taking a look at the bigger picture and applying the Fibonacci retracement tool from the 2002 low to the 2007 high, it can be seen that the 0.382 level (1268) comes in very close to the 1.618 (1265). Only 3 points off! The more levels you have coming in around the same price, the stronger the likelihood of it being a key support/resistance level. Figure 4 demonstrates this.
Figure 4: Weekly bar chart with the Fibonacci retracement tool
What if you don’t have ProfitSource? Easy! With whichever charting software you use, take a pen and calculator or use Excel and plot the key levels on yourself. How can you use this with your trading? Have the key levels on your chart and don’t enter a trade just shy of these levels. Wait for them to be broken and then enter a trade with the trend. Conversely, if you see signs of a reversal around these levels, wait for confirmation from your technical analysis tools (moving averages, crossing of recent tops/bottoms, OBV, RSI…) to trigger your entries.
Where to from here? Well, if the market continues its recent strength, then 1534 to 1576 (October high) will be a potential resistance level. Should the market break down then the price of 1077 (61.8%) from Figure 4 is a logical target. We now have two scenarios in mind, so nothing will take us by surprise. This is not a bad way to be. Simply trade with the trend.
Make it happen!
Guy Halpin Senior Writer & Options Strategist Optionetics.com.au ~ Your Options Education Site
www.optionetics.com/market/articles/19583
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Bozur
Amicus
Posts: 5,515
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Post by Bozur on Jun 4, 2008 12:27:20 GMT -5
Fibonacci and Golden Ratio
* Author: mono74 * Total views: 62 * Word Count: 820 * View PDF
Add2Netvouz The Fibonacci numbers Golden ratio can be used to describe the proportions of everything from nature to the smallest building blocks, such as atoms, to the most advanced patterns in the universe, such as unimaginably large celestial bodies. Nature relies on this innate proportion to maintain balance, but the financial markets also seem to conform to the Fibonacci Numbers "golden ratio." Here we take a look at some technical analysis tools that have been developed to take advantage of the Fibonacci Numbers Golden Ratio.
The Mathematics Mathematicians, scientists, and naturalists have known the Fibonacci Numbers Golden ratio for years. It is derived from something known as the Fibonacci sequence, named after its Italian founder, Leonardo Fibonacci (whose birth is assumed to be around 1175 AD and death around 1250 AD). Each term in this sequence is simply the sum of the two preceding terms (1, 1, 2, 3, 5, 8, 13, etc.).
But this sequence is not all that important; rather, it is the quotient of the adjacent terms that possesses an amazing proportion, roughly 1.618, or its inverse 0.618. This proportion is known by many names: the golden ratio, the golden mean, PHI, and the divine proportion, among others. So, why is this number so important? Well, almost everything has dimensional properties that adhere to the ratio of 1.618, so it seems to have a fundamental function for the building blocks of nature.
Prove It Take honeybees, for example. If you divide the female bees by the male bees in any given hive, you will get 1.618. Sunflowers, which have opposing spirals of seeds, have a 1.618 ratio between the diameters of each rotation. This same ratio can be seen in relationships between different components throughout nature.
Try measuring from your shoulder to your fingertips, and then divide this number by the length from your elbow to your fingertips. Or try measuring from your head to your feet, and divide that by the length from your belly button to your feet. The results the same, somewhere in the area of 1.618. The fibonacci numbers golden ratio is seemingly unavoidable.
So we then transalate this to finance and stocks. The markets have the very same mathematical base as these natural phenomena. Below we will examine some ways in which this ratio can be applied to finance, and we'll show you some charts to prove it.
The Fibonacci Numbers Golden Ratio Studies and Finance When used in technical analysis, the fibonacci numbers golden ratio is typically translated into three percentages: 38.2%, 50%, and 61.8%. However, more multiples can be used when needed, such as 23.6%, 161.8%, 423%, and so on. There are four primary methods for applying the Fibonacci sequence to finance: retracements, arcs, fans, and time zones.
1. Fibonacci Retracements Fibonacci retracements use horizontal lines to indicate areas of support or resistance. They are calculated by first locating the high and low of the chart. Then five lines are drawn: the first at 100% (the high on the chart), the second at 61.8%, the third at 50%, the fourth at 38.2%, and the last one at 0% (the low on the chart). After a significant price movement up or down, the new support and resistance levels are often at or near these lines.
2. Fibonacci Arcs Finding the high and low of a chart is the first step to composing Fibonacci arcs. Then, with a compass-like movement, three curved lines are drawn at 38.2%, 50%, and 61.8%, from the desired point. These lines anticipate the support and resistance levels, and areas of ranging.
3. Fibonacci Fans Fibonacci fans are composed of diagonal lines. After the high and low of the chart is located, an invisible vertical line is drawn though the rightmost point. This invisible line is then divided into 38.2%, 50%, and 61.8%, and lines are drawn from the leftmost point through each of these points. These lines indicate areas of support and resistance.
4. Fibonacci Time Zones Unlike the other Fibonacci methods, time zones are a series of vertical lines. They are composed by dividing a chart into segments with vertical lines spaced apart in increments that conform to the Fibonacci sequence (1, 1, 2, 3, 5, 8, 13, etc.). These lines indicate areas in which major price movement can be expected.
Conclusion Fibonacci Numbers Golden Ratio studies are not intended to provide the primary indications for timing the entry and exit of a stock; however, they are useful for estimating areas of support and resistance. Many people use combinations of Fibonacci Numbers Golden Ratio to obtain a more accurate forecast. For example, a trader may observe the intersecting points in a combination of the Fibonacci arcs and resistances. Many more use the Fibonacci studies in conjunction with other forms of technical analysis. For example, the Fibonacci studies are often used with Elliott Waves to predict the extent of the retracements after different waves. Hopefully you can find your own niche use for the Fibonacci Numbers Golden Ratio, and add it to your set of investment tools.
www.onlineearnings.net/finance/stock-market-investing/
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