Projecting Reversals

This series will examine how EW analysis can be used to project turning points in the market. In order to quantify these turning points (swing highs and lows), we will need to understand fibonacci numbers and how they are used in EW analysis.

I won’t bore 90% of you with an essay on Fibonacci numbers. By definition, the first two Fibonacci numbers are 0 & 1. The remaining numbers are the sum of the previous two numbers. So it looks like this ~ 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144 … and so on. Traders have converted these Fib numbers into percentages by methods we won’t go into here. Common Fibonacci derived percentages that you will see used by traders are 23.6%, 38.2%, 61.8%, 127.2%, 161.8% and 261.8%. Non-Fibonacci derived numbers that are also commonly used are 50% and 78.6%. These percentages are applied to technical analysis (TA) in several ways: retracements, extensions, fans, arcs and time studies.

It’s the ratio of the numbers in the Fibonacci sequence that is significant to most traders, but actual Fibonacci numbers are also used. The one number that get’s Fibonacci devotees excited is 1.618 or its inverse .618. This proportion is known as the golden ratio, the divine proportion or PHI. It is derived by dividing a Fibonacci number by the number preceding it in the sequence. Some traders will tell you that the markets follow the proportions of the Fibonacci numbers because these ratios define human behavior and therefore market action. Fortunately, you don’t have to drink that Kool-Aid to believe in the power of Fibonacci numbers in technical analysis. When thousands of traders make trading decisions based on Fibonacci-derived levels on a chart, you will see market action be influenced by these levels. In a strong bull or bear market, you may only see a consolidation it the market isn’t ready for a reversal. Are Fibonacci support and resistance levels self-fulfilling prophecies? What difference does it make? They work!

I will be adding lessons nested under this tab that will discuss the projection of the end of the various Elliott Waves.

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