Fibonacci Analysis Read online

  Table of Contents

  Title Page

  Copyright Page

  Praise

  Table of Figures

  Acknowledgements

  Introduction

  CHAPTER 1 - The Mystery of Phi (1.618) and phi (0.618)

  Ratio, Means, and Proportion

  Pythagoras

  Fibonacci

  CHAPTER 2 - The Concept of Market Expansion and Contraction

  Market Symmetry, Expansion, and Contraction

  CHAPTER 3 - Support, Resistance, and Price Projections

  An Introduction to Fibonacci Expansion Price Targets

  CHAPTER 4 - Bridging the Gap Between the Nautilus Shell and a Market Chart

  Proportional Analysis

  Using a Proportional Divider

  Introducing Rhythmic Wave Diagrams

  Geometry in the Nautilus Shell

  CHAPTER 5 - Fibonacci Channels, Angles, and Cycles with Oscillators

  Cycle Analysis

  Fibonacci Angles

  CHAPTER 6 - Fibonacci Expansion Targets and Confluence in Time

  Fibonacci Applications for Time Analysis

  Market Character between Confluence Zones

  CHAPTER 7 - Rhythmic Wave Diagrams

  CHAPTER 8 - Harmonic Unity Within Market Price and Time

  Arithmetic Proportion

  Geometric Proportion

  Harmonic Proportion

  Harmonic Intervals

  Greek Harmonic Intervals, Tetrachords, and Scales

  APPENDIX A

  APPENDIX B

  Selected Bibliography

  Index

  About the Author

  About Bloomberg

  Table of Figures

  FIGURE 1.1 Hurricane Isabel

  FIGURE 1.2 The Golden Ratio

  FIGURE 1.3 Woman Teaching Geometry 1309. It is rare to find a woman teaching Geometry, one of the sacred sciences, as depicted in this painting from 1309. It shows her teaching a group of young monks.

  FIGURE 1.4 Nasdaq Composite Index Monthly Chart

  FIGURE 1.5 Leonardo Fibonacci—(Leonardo da Pisa), by Giovanni Paganucci, in the Camposanto di Pisa Cemetary, Italy

  FIGURE 2.1 Iceland Low

  FIGURE 2.2 The Golden Ratio Proportions

  FIGURE 2.3 Caterpillar—Weekly Chart

  FIGURE 2.4 Caterpillar—Weekly Chart

  FIGURE 2.5 Nautilus Pompilius Shell Compared to the Golden Spiral

  FIGURE 2.6 The Nautilus with the Golden Spiral

  FIGURE 2.7 Caterpillar (CAT)—Weekly

  FIGURE 2.8 Centex Weekly Chart

  FIGURE 2.9 Centex Weekly Chart

  FIGURE 2.10 Centex 3-Day Chart

  FIGURE 2.11 Centex 3-Day Chart

  FIGURE 2.12 Centex 3-Day Chart

  FIGURE 2.13 Centex 3-Day Chart

  FIGURE 2.14 Centex 3-Day Chart

  FIGURE 2.15 Centex 3-Day Chart

  FIGURE 2.16 Centex 3-Day Chart—Two Fibonacci Confluence Zones

  FIGURE 3.1 Centex 3-Day Chart

  FIGURE 3.2 Centex 3-Day Chart

  FIGURE 3.3 Centex 3-Day Chart

  FIGURE 3.4 Centex 3-Day Chart

  FIGURE 3.5 Centex 3-Day Chart

  FIGURE 3.6 Centex 3-Day Chart

  FIGURE 3.7 Centex 3-Day Chart—Creating Fibonacci Expansion Price Targets

  FIGURE 3.8 Centex 3-Week Chart—Longer-Horizon Data

  FIGURE 3.9 Centex 6-Month Chart—Short Time Horizons with Long-Term Market Implications

  FIGURE 3.10 Galaxy Messier 101, Hubble Image: NASA and ESA, February 28, 2006

  FIGURE 4.1 Map of Mesopotamia

  FIGURE 4.2 The Tablet of Shamash

  FIGURE 4.3 Phi Relationships

  FIGURE 4.4 The Colosseum in Rome

  FIGURE 4.5 Example of a Correctly Set Proportional Divider

  FIGURE 4.6 Right-Angle Measurement for Proportional Dividers

  FIGURE 4.7 Golden Spiral Geometry

  FIGURE 4.8 The Great Pyramid of Khufu

  FIGURE 5.1 China Shanghai Composite and Australia All Ordinaries Indexes

  FIGURE 5.2 Australian SP/ASX 200—Weekly Chart

  FIGURE 5.3 Australian SP/ASX 200—Weekly Chart

  FIGURE 5.4 Astralian SP/ASX 200—Weekly Chart

  FIGURE 5.5 Australian SP/ASX 200—Future Price Swings Using a Proportional Projection

  FIGURE 5.6 Australian SP/ASX 200—Finding the Significant Confluence Zone

  FIGURE 5.7 Australian SP/ASX 200—Creating a Future Price Projection

  FIGURE 5.8 Australian SP/ASX 200—3-Day Chart

  FIGURE 5.9 Australian SP/ASX 200—3-Day Chart

  FIGURE 5.10 Australian SP/ASX 200—Fibonacci Time Cycles

  FIGURE 5.11 1897 Dow Jones Rails and Industrials Chart

  FIGURE 5.12 Australian SP/ASX 200—3-Day Chart—Fibonacci Angles

  FIGURE 6.1 10-Year Japanese Government Bond—2-Month Chart

  FIGURE 6.2 10-Year Japanese Government Bond—2-Month Chart

  FIGURE 6.3 10-Year Japanese Government Bond—2-Month Candlestick Chart

  FIGURE 6.4 10-Year Japanese Government Bond—2-Month Chart

  FIGURE 6.5 EUR/USD—2-Month Chart

  FIGURE 6.6 EUR/USD 2-Month Chart—Confluence Zone Price Projection

  FIGURE 6.7 Advanced Application of Fibonacci Angles

  FIGURE 6.8 EUR/USD 2-Month Chart

  FIGURE 6.9 Ford Motor Company Weekly Chart—Price Internals

  FIGURE 6.10 CBOT Wheat Futures 1-Week Chart

  FIGURE 6.11 30-Year U.S. Treasury Bond Futures—5-Week Chart

  FIGURE 6.12 COMEX Gold Futures

  FIGURE 6.13 Hong Kong WEB (EWH) 2-Week Chart

  FIGURE 7.1 Nautilus Shell Geometry

  FIGURE 7.2 Frog Skeleton with Rhythmic Wave Analysis

  FIGURE 8.1 Centex Corp. (CTX) 2-Week Chart—Arithmetic Proportion

  FIGURE 8.2 Geometric and Harmonic Proportions

  FIGURE 8.3 Musical Intervals Expressed as String Length Ratios

  FIGURE 8.4 S&P 500 Futures Respecting a Harmonic Perfect Fourth and Perfect Fifth Interval

  FIGURE 8.5 S&P 500 Futures—Combining Harmonic Ratios

  FIGURE 8.6 Rhythmic Wave Diagram

  FIGURE 8.7 Ulam Spiral

  FIGURE 8.8 Ulam Spiral Pattern—Prime Number Pattern

  FIGURE 8.9 Ulam Spiral Pattern—Subset of Primes

  FIGURE 8.10 Sunflower Head

  FIGURE A.1

  FIGURE B.1 Australia and New Zealand Banking Group Ltd. 3-Day Chart

  FIGURE B.2 Hong Kong Index 2-Week Chart

  FIGURE B.3 Nikkei 225 Stock Average 3-Day Chart

  FIGURE B.4 Nikkei 225 Stock Average 3-Week Chart

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  © 2008 by Aerodynamic Investments, Inc.

  All rights reserved. Protected under the Berne Convention. No part of this book may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher except in the case of brief quotations embodied in critical articles and reviews. For information, please write: Permissions Department, Bloomberg Press, 731 Lexington Avenue, New York, NY 10022 or send an e-mail to [email protected].

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  This publication contains the author’s opinions and is designed to provide accurate and authoritative information. It is sold with the understanding that the author, publisher, and Bloomberg L.P. are not engaged in rendering legal, accounting, investment-planning, or other professional advice. The reader should seek the services of a qualified professional for such advice; the author, publisher, and Bloomberg L.P. cannot be held responsible for any loss incurred as a result of specific investments or planning decisions made by the reader.

  Library of Congress Cataloging-in-Publication Data

  Brown, Constance M.

  Fibonacci analysis/Constance Brown.

  p. cm.—(Bloomberg market essentials)

  Includes bibliographical references and index.

  Summary: “Fibonacci Analysis gives traders a first step toward applying Fibonacci analysis in the market. The book covers key elements of this technical analysis tool. Traders will get up to speed quickly on its unique benefits. The major ratios between numbers in the Fibonacci sequence describe predictable market patterns. Fibonacci analysis analyzes these movements to identify future market prices”—Provided by publisher.

  ISBN 978-1-57660-261-4 (alk. paper)

  1. Investment analysis. 2. Speculation. 3. Fibonacci numbers. I. Title.

  HG4529.B762 2008

  332.63’2042—dc22

  2008021539

  Geometry has two great treasures: one is the theorem of Pythagoras; the other, the division of a line into extreme and mean ratio. The first we may compare to a measure of gold; the second we may name a precious jewel.

  —Johannes Kepler (1571-1630)

  Acknowledgments

  FIBONACCI ANALYSIS IS a personal passion of mine, and I would like to thank the entire team at Bloomberg Press—including David George, JoAnne Kanaval, Dru-Ann Chuchran, and Leah Shriro—for raising the quality bar to the highest standard possible. My special thanks go to Stephen Isaacs. With each book we’ve done together, my trust in him grows.

  Another important part of the team behind this book was Market Analyst Software, the Australian software vendor that has developed features and tools to push this subject past industry conventions. I would particularly like to thank Jonathan Garrett and Matthew Humphreys, who have struggled through many versions of the software development process to support my many requests. None of this would be possible without the support of the company’s founder, Mathew Verdouw, who is committed to creating a revolution in technical analysis.

  Last, but not least, is the personal support I was given behind the scenes from enthused colleagues and friends. That must also include the little Trade Street Gallery Coffeehouse in Tryon, NC, which attracts phenomenally accomplished Ivy League professors, physicists, business executives, and artisans and musicians who make an impact in such diverse fields as the Broadway theater and specialized fabrics protecting the world’s firefighters. The Trade Street Gallery Coffeehouse is a mecca of talents, and the positive energy and enthusiasm is indeed infectious.

  A lot of people have cared about and devoted their best efforts to this work. I hope this book will stand up to the test of time and become worn and dog-eared from years of use.

  Introduction

  TRADERS HAVE BEEN asking me for more than ten years to write this book. Being a fund manager, there was no chance I would write a comprehensive book on the price-projection methods I used or the research that was developing from the methodology. But times change and a wise partner of mine asked, “What is your business exit strategy going to be?” He explained that all the knowledge and wisdom you have gained over the years will be lost if you have no plan to pass it on to the next generation. It is not enough to come, extract from the markets, and then hide in a cave with the best gems you have polished over the years tucked safely away in the deepest partitions of your mind. What good was the journey if someone does not pick up the flag and continue to move it forward?

  I never felt ready to put into print the most important work that the markets had trained me to use as the cornerstone of my various geometric methods. There was always more I needed to prepare before unveiling this work to my peers. It is alarming how time seems to fly by and indeed odd how someone becomes branded a specialist. One day, I was just working hard to catch the leaders in my craft, and then one morning, I awoke to find that the person looking back at me in the mirror was the one being hounded by others to reveal a deep hidden secret she held. There were no secrets except what was earned through hard work and a relentless passion to gain a better understanding of why something worked with each new market experience.

  The final chapters of this book where completed at the end of December 2007. Book production schedules being what they are, this book could not be released until some months later. So with great interest I watched as 2008 began another significant equity decline, knowing this book contained the global market setup that helped to correctly identify the events that have since followed. Calling such moves before they happen and when is how my reputation grew within our industry. But how can one make such a claim well in advance? All the charts, targets, and methods within these pages where captured and described in real time to help you see why these methods never fail to astound and inspire me to continue to learn more.

  Markets truly form a mathematical price grid when you know how to read the data. Every effort has been made to make these methods transparent for your use. But there will be much work needed on your part to master these techniques. Space constraints limited the amount of detail I could offer. Numerous examples cannot be developed when the body of work is so extensive. Therefore, other methods I use such as custom oscillators, market geometry, Gann analysis, and others are sparingly referenced to keep the precious few pages I was given focused on the primary subject. Markets from around the world have been selected, but please understand the methods do not vary if your specific market and time horizon was not discussed.

  Make no misunderstandings; this book is likely the most important release I could offer you. If I were to write a blueprint of my trading style and the gems that have served me best through times of greatest market volatility, the work would be a trilogy. The first book would be the one in your hands today on Fibonacci techniques. The second book would be on harmonics. This book will leave you with an introduction to new concepts on harmonics, showing how we must push ourselves further to understand ratio analysis between market support and resistance zones on three axes. The third and final book would be about Gann analysis that incorporates th
e first two books, and then moves ahead to sophisticated methods of geometry and cycle analysis for timing precise pivot points and clarifying the price targets that have a common bond in major market moves.

  For the reader who wants to continue this work forward, you will find the most extensive bibliography on this subject that our industry has seen to date. Every effort has been made to be transparent so those who want to learn more can do so. If the text references Plato’s discussion of the Golden Section, the exact paragraph number in Plato: Complete Works has been identified. If a statement is made that the solar system has a Phi (or 1.618) relationship between all the planets, you will find a mathematical description of how this is true. Regarding Fibonacci, our industry has too often put the reader in the position that they must assume the author has found something to substantiate their claim. Not this time. There are no flippant generalities without proof, and readers will not be led to a dead end because the material offers no guidance on where the original thought or concepts were extracted. The methods are explained exactly as they have been applied for so many years. But that does not mean they will be easy. This book will require patience and work on your part. There are no shortcuts.

  The hardest part for you is to toss out the old methods and assumptions you may be familiar with now so you can examine without prejudice the new. The more you can let go of old thinking, the easier you will find this book. However, be assured, many who know these methods from my semiprivate seminars will warn you that it takes time, effort, discipline, and practice. But your efforts and time will be rewarded, because these methods will answer the questions all traders need to ask. Where is the market going? At what level should my stop be entered? How much should be leveraged into the position based on the size of my trading account? What price level can tell me I am in trouble before my stop is hit? How much can or should I buy or sell given a second or third opportunity? Few traders can answer all these important questions. The accuracy of your answers will dictate if you will be around for long trading markets. The real goal for any trader is longevity. This race has no start or finish line. So choose wisely when and how you enter the race.