|
If you want a complete copy of
the report go to BetterBizBooks.com
or click on this link. The file is approximately
1.05 Megabytes so it might take some time to download if you
are using a 56k modem.
This section of the report is
available in .pdf
format for those that wish to have a nicely
printable version of it. The file is approximately 270 kb so it should download quickly. Just right click your
mouse on this link
and it will begin to download.
In this particular section I
want to spend some time looking at Fibonacci analysis, a tool
that some technical analysts swear by. Fibonacci
numbers are commonly used in conjunction with other techniques
to trade and I have used
this methodology in the past with much success and a few
failures (when I first didn't know enough about the
tool.) Allow me to first explain what Fibonacci theory
is before illustrating the theory in some charts of the
S&P 500.
Leonardo Fibonacci, a
mathematician in the 1200’s created a numerical sequence of
numbers.
From left to right after the first two numbers, the values
increase successively. Each number, in turn, is determined by
the sum of the previous two numbers.
1, 1, 2, 3, 5, 8, 13, 21, 34,
55, 89, 144, 233, 377,.......to get the next value of
Fibonacci series after 377 add 233 to 377 and arrive at 610.
The other interesting
relationship of this number sequence is that if we take the
ratio of two successive numbers in the Fibonacci series (that
is, we divide each number by the number after it in the
sequence) we will move towards a particular constant value.
That value is 0.6180345 which has been referred to as “the
golden ratio”. If you also calculate the ratios using
alternate numbers in the Fibonacci series (that is, do the
same calculation but skip over a number) the resulting ratios
approach e 0.38196
Many technicians use
Fibonacci numbers in their Technical Analysis when trying to
determine support and resistance, and commonly use 38.2%, 50%,
61.8% retracements. Commonly thought, a .382
retracement from a trend move will tend to imply a
continuation of the trend. A .618 retracement implies
that a trend change may be in the making. Many such
rules have been adopted by technicians.
The first thing we have to
understand is that Fibonacci basically is about human
behavior. The basic thought is that humans can only
endure so much pain or pleasure before some people rebel and
do the opposite. It is quite similar to Elliot Wave
Theory, another technical analysis tool. At the end of
the day technical analysts believe that the dominant trend
will normally dominate.
Technical analysts that utilize
Fibonacci theory look at the top and bottom of a recent
market move (on a closing basis) to determine what level the
market will move back to, based on the previously mentioned
ratios of .382, .5 and .618.
So lets look at an example:
Notice how the chart below
shows lows and highs based on market moves? In May the
market moved by 60 points to the upside. In June the
same 60 point swing from bottom to top was experienced
also. Then, in July it was repeated again. In this
example, if we have correctly picked the appropriate market
top, the retracement levels would be shown below.
Why did I pick 993 rather than
926 as the market top?
The reason for this is due to
market movements. The 926 level had a prior low of 876
but it was a one day blip on the radar and appears to be more
of a speed bump on the way down. Additionally, the
market only traded their for a few minutes whereas the 934
price area was tested for 2-3 days, signalling that there were
buyers and sellers that agreed it was an appropriate
level.
Remember what I said in
section two. Longer-term trends matter more than
shorter-term trends.
So what is the conclusion from
the chart above?
If I picked the appropriate top
I don't anticipate the market moving above (and then closing
above) the 918 price level during this rally.
Given that we lots of
"overhead supply" - people that want to sell to
break-even, weak corporate EPS growth, weak economic growth
and high levels of indebtedness amongst consumers,
corporations and the government I believe it is highly likely
that the market will roll over and retest prior
lows.
Legal
Disclaimer:
BetterBizBooks.com
is founded and operated by
Dan Ross and is an personal website to provide independent and
public research. This report is provided as a public service.
All information provided must be understood as opinion only and
is not investment advice. All statements and expressions are the
opinion of BetterBizBooks.com
and are not meant to be a
solicitation or recommendation to buy, sell, or hold any form of
investment vehicle. Any opinion made by BetterBizBooks.com
is based on raw data and
reports that have been presented by independent government
agencies, private industry associations and other sources.
BetterBizBooks.com
makes no representation or
warranty as to the accuracy of the information provided. The
information provided should only be used as a research tool.
Reading of this document constitutes your acceptance of
these terms and conditions.
| 
