Newsletter-08-19-07
Question -
Do Fibonacci's really work?
We'll take a look at the DOW
30 to see.
First,
we'll take a look at the DJ-30 chart year to date. The only thing
unusual here is how strong the move was from the March-07 low to the
July-07 high. and the fact that the move was up. July is not usually
an upward move in the markets. 
Figure 1 DJ-30
year to date
Now
let's add the Major Elliott Wave counts to the chart and
apply
Fibonacci extensions to waves 1 through 3. Fibonacci extensions aren't
anything magical. It is simply taking the distance of one wave an adding
the Fibonacci retracements to the next wave going in the same
directions. In this case the length of wave 1 is multiplied by each
Fibonacci value (0.618, 1.0,1.618, and 2.618) and then added to the
lowest point of wave 2 . The result is a prediction of where
new
pricing will occur resistance on the way up or support on the way down.
Keep in mind that while Fibonacci levels are defined as
specific
valuesthey are only projections of potential areas. Jjust like in my
previous newsletters on support and resistance the
levels should be treated as zones not exact price points. No indicator
is that good and Fibonacci's are just another indicator. How good it is
depends on the person using it. If you are really into
Fibonacci's as a means to make trade decision then I suggest you visit
Mark
Braun's website www.mjbraun.net
Mark uses the convergence of multile Fibonacci retracements
over many waves. 
Figure 2 Wave 3 projections If
we move forward to the next wave and calculate the Fibonacci extensions
we will see again there are many points where the price reversal or
consolidation occurs at the Fibonacci levels. these 2 charts
show why it is important to know the old Fibonacci levels because price
will revisit those areas and usually occur some amount of
support or resistance and the more times the levels are touched the
more likely they are to offer major support or resistance.
Some people such as Mark Braun that I mention above use all
the waves while I only use the major waves. The shorter your trading
cycle the more waves you should use. 
Figure 3 Wave 3 pullback projections You might be looking at the
2 charts above
and wondering about why in neither chart have I mentioned the
highest
price point(wave 5). I personally think wave 5 is most
difficult wave to gage. I'm sure the Elliott Wave gurus would
differ with me on that point. Before we take on wave 5 let's
back up the chart to the peak to wave 3 and checkout the corrective
wave 4 prediction. Keep this in mind as we move forward to wave
5. 
Figure 4 Wave 4 Elliott Wave projections So
let's look at wave 5 the point where most investors, analysis and
Elliott wave gurus think it is time to consider entering the
trade. In fact, many will wait until the wave 3
high is taken out before entering a trade. This is not a bad
approach as wave 5 is said to be to most predictable wave. If
you enter the trade using the wave 3 high as your stop-loss point then
you have a low risk trade. If the price then makes any of the other 3
projections you have a very profitable trade. Swing
traders on the other hand would likely enter when the wave 4 low is
retested and not breached. 
Figure 5 Wave 5 extension projections Have a plan before you trade
Determine
your price points The
reason I chose to use the DJ-30 is because it is unlikely anyone is
trading it so folks won't run out and try to trade based on this
example. However, it does make the point that one can use
Fibonacci retracements and extensions to trade equities. I consider the
Elliot
wave and Fibonacci projections to be indicators just like any other
indicator. They works very well for those that take the time to
understand them. It really isn't hat difficult and does not really
require software costing thousands of dollars. You can create a simple
spreadsheet to do the calculations.
Determining
Risk Using the support/resistance
Fibonacci's is one
of the few tools available to help project possible future price
reversal points. Elliott Wave is based off the Fibonacci numbers
but it comes with a lot of rules that can confuse even the best minds.
Seems like there is an exception for every EW rule. So I have decided
to just use them as a guide and use the Fibonacci's as the projected
price points. It makes for very good support/Resistance
zones.
Fibonacci's - Do they really work? In
my opinion they do work and work well. It is uncanny the way
prices will consolidate or reverse at a projected Fibonacci level.
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events:
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TradingOurWay, we are currently planning a Financial Seminar at Sea
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It’s
an 8 day cruise to the Panama Canal with 4 sea days of classroom
activities. We would love to have everyone join us! Complete details
can be found at Tradingourway.
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Update 08-22-07 We have been following the DOW-30 and
how it is tracking to Fibonacci retracements and extensions. Today the
DOW closed almost exactly on the Wave 4 projections. It is also in a
support zone and the 1.618 extension of the previous wave 3 up. It also
closed exactly on an old trendline which is not shown on the chart
below. 
The
1.618 extension offered some resistance on the DJ-30
or maybe is it just the FEDs accomplishing what they wanted by injecting
$120 billion and a 50 bases point interest rate reduction. In either
case we are seeing some resistance in this support zone. Looks
like we will have to wait until next week for an indication of
direction.
Update 08-24-07
On
8-23-07 we saw a Doji form right on the old trendline. It was a day of
great indecision on lighter than normal volume. I base normal volume on
a 63 day simple moving average. That provides 3 months of trading.
If
you look at the Get chart above you will see the Wave 4 projection was
a range between 13,242 and 13,412. Today it closed at 13,378 right in
the range. Lokking GET now it only shows the upper range
projected. This is a very good indication that we have reached the high
point of the wave 4 correction. That leaves me to believe we will see
the beginning of the wave 5 down move start somtimes next week.
 Have a great week-end. Take your special someone out for a nice dinner and movie. | 
