- Fibonacci Analysis - haranfx
Fibonacci analysis is based on the Fibonacci number series and the Fibonacci ratios, which are then applied to price charts.
The Fibonacci Number Series and Ratios
The Fibonacci sequence of numbers is as follows: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, etc. Each is the sum of the two preceding terms and it continues infinitely. For market analysis, the ratios are more important than the series, although the ratios are calculated and based on the distance between Fibonacci numbers.
Using three numbers from the Fibonacci sequence will provide the ratios. Say, one chooses 21, 34, and 55. 1.)(34-21)/34 = 38.2%; 2.)(34-21)/55 = 23.6%; 3.)(34-21)/21 = 61.8%. 50% is also used by traders.
Support and Resistance
Support and resistance are junctures where prices are driven down by excessive supply, or driven up by demand.
Support is the price level at which demand is thought to be strong enough to prevent the price from declining further. As the price declines towards support and gets cheaper, buyers are more inclined to buy and sellers are more inclined to sell. When the price reaches the support level, demand will overcome supply and prevent the price from falling below support.
Resistance is the price level at which selling (excess supply) is thought to be strong enough to prevent the price from rising further.
Stock Price Charts
An investor must make a chart of a stock (or rather just find stock charts on say, Yahoo.com or Reuters.com) that one wants to apply the Fibonacci ratios to. Essentially, one must find a movement that shows discernible peaks and troughs over a period of time.
Fibonacci Retracements
Fibonacci analysis is all about retracements. Retracements are when a correction (a short term price decline) or a market rally occurs that is in the opposite direction of a prevailing trend.
For example, say a stock has, over a discernable period of time, shown an increase of $20, from a trough of $80 to a peak of $100. Say the stock falls $5 in one day, to $95, a loss of 25% of the $20 upward major trend.
Fibonacci advocates believe that the stock will find support at 38.2% of the upward trend, or at $92.36. If the stock seems to stabilize around that number, that is, that it hovers for a period of time at that price, then one should buy the stock as it is very possible that it will then continue on its upward trend.
However, if the stock does not stabilize, but instead drops further past the 38.2% support, Fibonacci analysis dictates that it will find the next support price of 50% of the major trend, at $90. Again, if the stock stabilizes around $90, one should buy. If the stock continues to fall, then it will, accordingly, fall to the next support price of 61.8% of the major trend, at $86.44, at which an investor should consider buying the stock.
For a stock that has shown a long term consistent decrease, that is, a definite peak and trough, the opposite will occur; there may be market rallies that have discernible resistance levels that again conform to the Fibonacci ratios. An investor might consider selling the stock short at these resistance levels, as the stock then continues its downward spiral.
Citation
Brown, Constance. Fibonacci Analysis. New York: Bloomberg Press, 2008.
Bruce Silver - Bruce Silver has been an investor in stocks and stock options since high school. As he says" I prefer to trade calls; I am an optimistic ...
