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Elliott Wave Analysis - Category Archive


Dec 05
Saturday

Using Fibonacci Numbers in Trading to Predict the Market

Filed under Elliott Wave Analysis, Technical Analysis

1937 vs 2007 fibonacci correlation by www.theinflationist.com
1937 vs 2007 fibonacci correlation by www.theinflationist.com

1937 vs 2007 fibonacci correlation by www.theinflationist.com

Although the backbone of our analysis is NOT based on fibonacci numbers or anything conventional, our analysis and comparison of 1937 vs 2007 produced uncanny results.

In 1937, DJI peaked at 194.4, bottomed at 98.95 and subsequent bear market rally peaked at 158. So it dropped 95.45 points from peak to bottom. Of this, the bear market rally regained 59.05 points (158-98.95). The ratio of retracement 59.05/95.45 = 0.6186. For those of you who are not aware of the principles of Fibonacci and its application in trading, Fibonacci numbers are numbers where each one is the sum of the previous two numbers. Read below for more details on Fibonacci numbers. We arrived at this ratio inadvertently, without even realising the significance of 0.618 until looking into it deeper. Coincidental? Perhaps.

Regardless, we applied the same Fibonacci ratio to the current rally in an attempt to see where this rally will peak. Based on the same Fibonacci ratio, a peak of 11255 will produce the same retracement as 1937. This has to be a closing price, which means the high of the day will probably hit 11300 for those who wish to microtrade.

We are concern enough to scale back some of our additional shorts opened Friday, to provide sufficient firepower to short 100% at 11300. 11300 appears high enough to wipe out the remaining bears in our camp and provide the undoubted confidence in bulls. This would fit with a “blow off” top we have been talking about. We will take the little profits we have from our S&P shorts opened Friday. Also will look into the weekly (or monthly if available) Binary Index trade for 11300 as insurance.

We have a busy weekend ahead so we will rush this analysis to print. We will add more to this as time permits so do check back.

Why compare 1937 ?

For new readers, our attention focused on 1937 after we compared all previous significant bear markets since 1929 and the Nikkei’s 1989 (because of the similiarities in monetary policies quoted by many eg “Mish” Mike Shedlock) - and found that 1937’s chart looked identical to the current. Check the full post:  1937 vs 2007 Crash Comparison Charts.

www.theinflationist.com
www.theinflationist.com

www.theinflationist.com

We then zoomed in on 1937 after noting the striking resemblance and compared with the current decline in more detail in our post: 1937 vs 2007 Bear Market Comparison. We were not sure though, whether the current rally equivalent was at point A or B (see below). We felt that if we were at point A, then that would mean that we have topped at 10500, and to expect a pullback before further rally to hit 11000 at point B. When news of Dubai defaulting came up, we thought that was going to be the “excuse” for the expected pullback. That was not to be as markets resumed the rally after the weekend to make higher highs.

1937 Crash Vs 2007 Bear Market
1937 Crash Vs 2007 Bear Market

We then searched the web to see if anyone else saw this. We found one - Louise Yamada. She tries to explain the similarities fundamentally and technically. Here is what she says about 1937 vs 2007 (2/5 videos)

Where to From Here ?

1937vs2007fibonacci2
1937vs2007fibonacci2

Good luck to all.

———————

Fibonacci Numbers, Fibonacci’s Golden Ratio

0

1

1

2

3

5

8

13

21

34

55

89

etc

The division of any two adjacent numbers gives the amazing Golden number e.g.
34 / 55 = 0.618

It is called the Fibonacci series after Leonardo of Pisa or (Filius Bonacci), alias Leonardo Fibonacci, born in 1175, whose great book The Liber Abaci (1202) , on arithmetic, was a standard work for 200 years and is still considered the best book written on arithmetic. It was the principal means of demonstrating and introducing the enormous advantages of the Hindu Arabic system of numeration over the Roman System. Leonardo’s reputation amongst scholars was deservedly great. It was so outstanding that King Frederick II, visiting Pisa in 1225, held a public competition in mathematics to test Leonardo’s skill and he was the only one able to answer the questions (Huntley 158). Fibonacci ratios occur naturally around us: width vs height of picture frames, no of petals in a flower, etc (see the mystery of Fibonacci Ratio and Numbers)

All entries filed under Elliott Wave Analysis


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