Saturday, November 14, 2009

Fun with Fibonacci Time Intervals…

Last Monday was the best fit for a Phi Mate and Bradley Model Turn date. No turn has happened as yet, the market is simply quanting and computing its way forward, looking set to retest recent highs. This is occurring despite divergences of historic proportions, valuations of historic disproportions, massive insider selling, and a consumer whose level of confidence in the economy is more truthful than government statistics which simply do not match statistics that are not subject to manipulation… things like tax receipts which are down jaw dropping amounts.

The more they spend, it seems, the less they get back. That’s what happens to crazy people who don’t understand nature or math.

Still, it seems pertinent to ask if turn dates have stopped working? Do the mathematical relationships of nature no longer have meaning? In fact, the majority of trading now occurrs on the back of just a few of the big players computers, they feed on dollar carry and interest arbitrage to get their fuel, and remain unbridled by any sense of adult supervision. That fuel, however, will not last forever, nature will reassert herself, just as she always takes care of excess. The turn will come, patience is a virtue afterall, and we are all being taught lessons in that regard.

Nature can be seen in the markets, I see it at work all the time… retracements that turn right on Fibonacci levels, pivot points that act as support and resistance, their underlying math related also to Fibonacci. For the uninitiated, Fibonacci numbers are those that are the sum of the previous two numbers in the sequence. Thus we have numbers that go 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, 1597, 2584, 4181, 6765, and so on.

While that sequence may not look important on the surface, this underlying math structure is the building block of nature. It affects the number of appendages on your body, the number of pedals on a flower, and it also can be found as the basis of wave structure. It is used in architecture, in design, and in marketing. It is everywhere. For those with more interest, you can find more math based upon this sequence here: Fibonacci Numbers.

Interesting things happen when you look at Fibonacci in terms of time. It is very common to find major market turns that are in Fibonacci relationships to major turning points of the past. Sometimes one relationship from one major turning point will happen on top of another. These points are the basis for Fibonacci turn dates. They can be counted in seconds, hours, days, weeks, months, or even years… These obviously do not always work, but they do have better odds of producing a turn than simply guessing. They do not tell direction or magnitude, only that whatever direction was in place is more likely to reverse.

“Oh pashaw,” you say. Well, pay attention and I think you’ll find that there is something to it. Usually we look at these relationships fairly close in, but yesterday I was playing around with the long term charts going back nearly a hundred years. Here are some charts I find interesting… no, I would not place money on any turns on this duration, this is an article of interest only…

Let’s start by looking at Fibonacci time relationships on the DAILY timescale… Below is a chart showing the S&P 500 with a Fibonacci daily time sequence that begins on the 1929 peak. Take a look at how day number 17,711 nailed the very peak of the market in the year 2000, and it wasn’t that far off many other turn points as well.

Next is a daily sequence of the DOW off the 1932 bottom. Note how it landed right in the 2002 low… that same thing happens on the SPX chart as well on this timeframe.

Next is a chart of the DOW showing the DAILY sequence off both the 1929 high and the ’32 low:

Note that the further out in time you go, the longer the time interval. That’s the Fibonacci function at work, always adding the last two numbers upon one another.

Now, this is why I am doing this piece to begin with. When you drop a WEEKLY sequence off of the 1929 high, it lands on NOW, as in THIS WEEK, the 4,181st week since the peak in 1929.

Now, you will note that this weekly sequence does not seem to land on the major turning points, so it may have little to no meaning, I don’t know, it’s just interesting, and we’re about to find out as there is no doubting that the trend into this sequence is up.

Here is the same chart of the SPX WEEKLY showing that week 4,181 just came into view.

Interestingly, on the MONTHLY time frame, we are approximately two more years away from the next sequence which will land in the year 2012 from the 1929 top, and in the year 2014 from the 1932 bottom.

That monthly chart is interesting because this timeframe cordons off the major Elliott waves as they progress... Wave 1 up to the peak in 1937, wave 2 down into the low near 1944, wave 3 up into the 1962 area, the sideways action of wave 4 into the last sequence showing, and where will it be when we land on it again in a few years? Hmmm...

Again, this is just fun with charts, something interesting to look at, nothing to get excited about for sure. Still, interesting that the weekly timeframe aligns closely with the recent Bradley and Phi Mate turn dates. I do believe we are very near a major top, but that belief comes from other areas of technical analysis. The primary count now in Elliott Wave analysis allows for one more wave higher. The fuel has not yet been removed from the criminals distributing their positions to the masses, a good reason for patience, no need to get ahead of the next move, it should take quite some time to play out.