Technicals | Sep 10 2010
Irregular market commentator Charlie Chartchecker sent in the following market-movement commentary on Wednesday. Given the firm educational character of the story, we have decided to publish it in full. For those readers who'd like an introduction to Fibonacci numbers, see the additional story at the bottom.
By Charlie Chartchecker
The nice thing about reading tealeaves is that the brain tends to see patterns that fundamentals don’t show. Its just a matter of how much imagination you have. Humanity spent millions of years looking at the night sky pinpointing a network of shapes and patterns and naming them esoterically such as Orions Belt that include 3 prominent stars. Ships sailed around the world navigating by such patterns, and still do so. Market practitioners do the same, navigating price action and its likely direction.
The same patterns arise with regularity as a result of price movement over time. Each pattern has its own name, application, and consequences based on previous the frequency and consistency of outcome. Fortunately, these patterns can apply across all markets, and timeframes, and not just one sector.
Patterns arise due to the retracement price movements in a measured way. One common measure is the Fibonacci ratios such as 23.6%, 38.2%, 50%, 61.8%, 78.6%, 88.6%, (see attached for understand as to that). Each pattern has its own defined targets that can be also identified by a Fibonacci ration that then become major pivot or reversal points. E.g. We see below a pattern with points X, B, & A (green) and the respective targets C and D (yellow) that form a probably pattern termed the Gartley Pattern.
Using other analysis, such as the indicators included with this chart, the pattern target zones can be further affirmed to perceive a future trend.
Some of the more esoteric patterns include Bat, Butterfly, Crab, and so on; even Dragon pattern. Each has its own dimensions and comparative consequences. Many of the patterns comply to Fibonacci ratios and dimensions, and others prove that there is in fact another set of ratios few traders are aware of.
A commonly known and referred to pattern is the Gartley pattern that has a 80% tendency to play out. There is a bullish and bearish pattern. The example below exhibits a bearish set up pattern in play.
To qualify or validate each pattern has certain dimensions or ratios that must be evidenced in order to qualify its interpretation and validate each of the pending consequences that each pattern reflects. E.g. The Gartley must show the following basic elements at least:
• B target point is a precise Fibonacci 61.8% of the retracement leg X-A
• B-C target points are a projection that must not exceed 1.618 (which hits 23.6 of the X-A leg)
• Target points A-B & C-D are legs which are most commonly close to equivalent
• Target point D is 78.6 of the X-A retracement.
• The C target is within the range of 0.382-0.886 of A-B retracement (which is 23.6 of the X-A leg)
Anything less than these ideal Fibonacci alignments usually result in “deeper” corrective structures, favouring what is termed a Bat Pattern (see below). The Bat pattern otherwise typically has a B target point at 38.2 or 50 where as the present DJIA outcome has hit the Gartley B target of 61.8.
We come therefore to the present DJIA weekly chart below showing a Gartley pattern set up.
The consequence of a bearish Gartley Pattern (otherwise seen as a W pattern) is that the eventual outcome (some time out) is a decline from target zone D.
Each target zone can be verified by marrying up its pivot-point with that of the indicator to identify major reversal points where the colour lines also cross over. The indicator presently having signalled a sell off at target zone B and with no sign yet of any change in the weather.
We presume therefore a high probability of the next target zone being C (if the indicator verifies at 23.6 level), followed by target D -after which it's all downhill for a major decline. The momentum indicator pattern tends to presently verify the same sequence.
Chart: DJIA – Weekly chart compressed Oct 2007 to present
Charlie Chartchecker is the pseudonym of a 52 year old Project Director and Forensic Market Analyst with trading experience since the 1980's. All analysis, conclusions and views are his and not FNArena's.
Basic Fibonacci Numbers
The Fibonacci sequence was discovered by Leonardo de Fibonacci de Pisa (b.1170- – d.1240). Although the numeric series was devised as the solution to a problem about rabbits, the concept generally relates to all natural cycles of growth and decline.
This answer is based upon the equation: un+1+1 = un+un-1.
The sequence of the Fibonacci numbers are seen any nature all over the planet, from shell growth to the measurement of the planets. It is as follows:
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144…. up to infinity
Starting with zero and adding one begins the series. The calculation takes the sum of the two numbers and adds it to the second number in the addition.
(0+1=1)…(1+1=2)…(1+2=3)…(2+3=5)…(3+5=8)…(5+8=13)…(8+13=21)
After the eighth sequence of calculations, there are constant relationships that can be derived from the series. For example, if you divide the former number by the latter, it yields .618.
34/55 = .618181 ~ .618
55/89 = .617977 ~ .618
89/144 = .618055 ~ .618
Dividing the latter number by the former number derives another relationship from the sequence. This relationship yields approximately 1.618.
55/34 = 1.617647 ~ 1.618
89/55 = 1.618181 ~ 1.618
144/89 = 1.617977 ~ 1.618
Two other numbers often used when applying Fibonacci numbers to chart analysis, 0.786 and 1.27, are the square roots of 0.618 and 1.618.
There is more to this subject, and other ratios that work in sequence, but for now this helps anyone with limited knowledge.
