FIBONACCI PRICE LEVELS
The Fibonacci number series is a fascinating topic in its own
right without attempting to explain its use in projecting stock
market and commodities prices. The series bears the name of a 13th
century mathematician who reportedly received inspiration for
his work from the Great Pyramid of Gizeh. Many of the Great
Pyramid's geometrical proportions are Fibonacci ratios. Among
the most interesting and less known tidbits are: the Pyramid's
height is 5813 inches (5-8-13, and the inch was the standard
Egyptian unit of measure); the total measurement of the four
sides of the base is 36524.22 inches, exactly 100 times the
length of the solar year.
Ancient Greeks showed a fascination for Fibonacci ratios and
referred to .618 as the "Golden Section." Existing samples of
Greek architecture, art, and pottery show the proportions.
Pythagoras, the father of geometry, left us to ponder a
Fibonacci triangle inscribed with the words "The Secret of the
Universe." Many modern works claim a relationship between the
number series, natural phenomena, and human behavior. The many
examples of these relationships are perhaps more than mere
coincidence would suggest.
Mystical considerations aside, Fibonacci number ratios between
market swings not only show up enough times to be more
than coincidence, they're downright expected. Whenever a trading
signal is hit a Fibonacci price cluster is calculated and placed
on the swing chart. The ratios are derived internally from
different waves of the current swing and externally from prior
swings of the same degree. The calculations are straightforward
and can easily be performed with a calculator or spreadsheet.
The only "trick" is knowing which ratios and which swings to use
for current market conditions. Generally four or five price
lines resulting from these calculations are placed on the swing
chart. This amount is somewhat limiting but it appears to be a
good compromise between providing valuable trading information
and cluttering the chart. The daily charts show more Fibonacci
Just because there are Fibonacci price levels on a chart does
not mean that prices will ever reach them. The levels are not
predictions of future price levels. They serve a purpose only
when, and if, prices get to that level.
When prices do get to a Fibonacci level you want to look for
a change - a stall or reversal. If prices jump or fall through a
particular level look for prices to at least reach the next
level. Robert Miner (and W.D. Gann before him) equates this phenomenon to the action of
electrons orbiting a nucleus. Electrons can exist only in
certain energy levels, not scattered randomly around the
nucleus. Like electrons, stock prices tend to 'jump' between
energy levels, and that energy level is usually the next
Fibonacci price level.