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Dec 05
Saturday
Elliott Wave Analysis, Technical Analysis

Using Fibonacci Numbers in Trading to Predict the Market

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)


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12 Responses to “ Using Fibonacci Numbers in Trading to Predict the Market ”
  1. The 1937 peak was to the first wave up following significant bottom set in July 1932. That bottom, itself, occurred following a collapse of 89% in the Dow Jones Industrials Average. Over the course of the interim during which the market collapsed (1929-1932) and then made its initial comeback (1932-1937) all manner of deleveraging came to pass, sufficiently wiping out the greater bulk of unsustainable financial claims against existing physical wealth producing capacity. Nothing of the sort has occurred in the current instance. Therefore, the better prior period to compare the present one to is that leading into March 1930.

    My take on fibonacci analysis is that given material similarities of one period versus another, one should not be surprised by how remarkably consistent psychological reactions affect how money moves into and out of risk assets (like, for example, equities), thereby resulting in some common fibonacci relationship to form. Yet, expect this?  I rather suspect certain subtle differences in existing material conditions distinguishing one period from a prior period are likely to result in different fibonacci relationships a given counter-trend move has with an immediately preceding move in the direction of the trend. Thus, even though I might believe the current period is, materially speaking, more like March 1930 than November 1938, I will not go so far to suppose the current, counter-trend reaction off March ‘09 bottom is likely to share the same fibonacci characteristics as were displayed during the counter-trend rally off November 1929 bottom.

  2. Hi Tom thanks for your comments. I agree that fundamentally, the current decline does not fit with 1937 in terms of monetary policies etc. We compared most bear markets on our previous post here: http://theinflationist.com/great-depression/comparison-of-bear-markets-1929-vs-1937-vs-1976-vs-1987-vs-2000-vs-current-bear-market-charts - and found that the current decline looked most identical to 1937 purely from a chart perspective. So we zoomed in on 1937 here
    http://theinflationist.com/technical-analysis/comparison-chart-1937-and-current-bear-market-rally-update-11112009. We then looked around to see if any of the “experts” see this, and found one: Louise Yamada. we will post this above. We will also look into 1930 later.

  3. I quite agree with Louise Yamada’s structural bear market thesis. Although appreciating how nothing is set in stone in this business, I believe there is a good case for fearing the possibility major indexes might return to levels last seen in the 1987-1994 time frame sometime over the next few years. This might seem an extreme forecast, yet considered from a very long-term perspective (100 years, say) an index like the Dow Jones Industrials Average still would remain in an uptrend should such a steep decline, indeed, come to pass (keeping perspective offered by the likes of Jeremy Siegel and Ben Stein credible, at least in principle).

  4. To continue a comparison with today and the Great Depression, I found a comparison that could be interesting among 3 charts: The Great Depression vs. Weekly S&P current vs. 5 Minute S&P from Friday. 
     
    The first chart shows the DJIA from June of 1929 through April of 1930.
    The second chart shows the weekly S&P 500 from the top in 2007 to the bottom in 2009.
    The third chart shows the 5 minute S&P 500 from the trading day on Friday.
     
    Disregarding some minor variations because no charts will be perfect duplicates of each other, from a distance the three charts all sport similar looks. I examined these charts because the comparison might give some clues as to where the market is heading. This technique is noteworthy, since looking for patterns in multiple time frames and multiple time periods can help solidify a hypothesis about a trend. These three charts show interesting parallels—especially the way that wave 3 (the large downward thrust) looks in all three of them. Plus, all three show a countertrend rally to the approximate 50% retracement level.  After the stock market crash in 1929, the market rallied about 50% before it shed almost another 80%. Notice the break-away gap in the middle of wave 3 in both the weekly and 5 minute S&P 500 charts.
    See the charts here: http://www.graspthemarket.com/elliottwave/20091206a.php
     
    Therefore, it appears from a 5 minute level that there could still be a bit of a rally to the 50% retracement level early on Monday, and then a continuation down—probably to break other key technical levels.

  5. Thanks for your analysis GTM. For now I am going to hold back on shorting more - just in case. Either way I am happy.
    Tom, been reading your posts on your site - great work and analyses. Feel free to post as a guest author so that it gets the deserved attention of our readers.

  6. This discussion is awesom guys.  Thanks for all the insights.  I’ve been checking back on this site for a while, and I really enjoy trying to make connections to past markets.  admin, I’ve been scared “shortless” for about the last month, and like you, I haven’t added any right here.  If we keep rallying, I still have cash to play add to the shorts.  I’m also trying to apply cycles to my analysis, but I haven’t really come up with something that reliable yet.  Any suggestions?

    Finanlly whether Tom is more correct or admin on the “where we are in history” the picture ahead of  us doesn’t appear that bright.  Thanks again, and I enjoyed the discussion.

  7. Hi Gtm, I do not think there is a “correct” answer to where we are in history. I do not believe the past is able to predict the current decline to a tradeable degree. I am using it as a “worst case” scenario. I was abit surprised though to see how similar 1937 is (chart-wise). I know very little about cycles and EW analysis - I prefer to keep my analysis on statistics and intermarket and inter-sector analysis but almost always base my long term trades on fundamentals (hence my shorts).

  8. You know the correction is on….Google searches for Louise Yamada has spiked. I don’t think it’s time to be the first in but change it is a comin’…..

    Check out Adam Hewison’s latest video on how he’ll play it…..
    Where Should YOU be in the S&P 500? >http://tinyurl.com/yjjd226


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