Harmony and me…we’re pretty good company. From the moment I first heard about Fibonacci, I was l hooked. A numerical sequence that produces mysterious and magical ratios that show up in everything from the design of pine cones and nautilus shells to the layout of pyramids of Giza and dimensions of the Parthenon? Sign me up.
When I heard these ratios could be applied to investing, it was music to this math geek’s ears. Most of my early efforts were focused on prices, but I’ve spent the past few months studying the application of Fibonacci ratios to time levels, as well.
Fibonacci time ratios are a trickier than price ratios. It’s pretty simple to eyeball a stock’s move from 10 to 20 and calculate a .618 retracement of the 10 points. Just make sure the starting and end points are significant, and check to make sure you’re considering all the alternatives, and Bob’s your uncle. Okay, so it’s a little more work than that, but not terribly complex.
Time series, on the other hand, deal with periods that can extend well beyond the standard computer monitor. It can be really, really tricky to find start and end points that provide a good fit for a set of ratios, not to mention a reliable long-term stream of market data.
I’ve tried hundreds of combinations over the past few months, trying to find a set that fit the actual market results well, i.e. it captured the major moves with the primary Fibonacci ratios. And, I’ve found one that’s very interesting in that it fits the two market crashes in the past 10 years.
October 8, 1998 represented the bottom of a 22% decline — the first 20%+ decline the market had seen since Black Friday in October of 1987. It’s been largely forgotten since the arrival of its two more dramatic siblings in 2002 and 2009.
Setting October 8 as the starting point, the October 10, 2002 bottom falls about a week from the .146 Fib level, and the March 6, 2009 bottom falls only a few days away from the .382 level.
And, as you might have noticed, the last Fib level of .500 occurred a week ago on June 1. Like the .236 level, it hasn’t been (so far) accompanied by a 50% drop in the markets. Does that mean we’re out of the woods?
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