How to Time Market Reversals with Fibonacci Numbers
Financial markets are very similar to a football game. When the final whistle sounds, the game is over. Traders concentrate on traditional indicators, like price and volume studies, while longer term investors rely heavily on fundamentals. Both leave out a very important dimension that few are aware of and even fewer understand. This element is the time function. Trends will continue longer than most people anticipate, but one day end suddenly. Why is this? Markets ebb and flow according to a natural symmetry that corresponds with universal sequences. Most traders are aware of Fibonacci price retracements but there is a more precise way to use Fibonacci studies. This article will demonstrate a highly effective pattern recognition methodology that will alert you to changes in trend.
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Fibonacci and Lucas Number Series
Markets have a high probability tendency of reversing on a Fibonacci number or ratio in all degrees of trend. Common retracements are 38%, 50%, 61.8% or 78.6% and extensions are 1.618 and 2.618. These calculations correspond to the price action, but at the same time prices are traveling along the Fibonacci price axis, they are also moving along a time axis in perfect market precision. For instance, an index or stock can move 21 units of time in one direction, retrace 13 units for 34, move up another 21 bars and hit the 55th bar. The same relationships hold whether we are dealing with a weekly time frame or a 1-minute chart.
After thousands of hours of observation or trading I’ve come to discover these Fibonacci tendencies work about 60% of the time. Since 40% is a large margin for error I almost concluded keeping track of Fibonacci time sequences just didn’t work often enough for it to be practical. Then one day while surfing the net I stumbled upon the Lucas series. French mathematician Edouard Lucas (1842 to 1891) discovered the significance of this series of numbers. It was Lucas who gave the Fibonacci series its name. Lucas is not a theory to be buried in a college textbook. It exerts a profound influence on financial markets in all degrees of trend.
What is more significant is when I went back to the charts I discovered many time sequences in all degrees of trend were completing on 7, 11, 18, 29, 47, 76 or 123 bars. The margin where symmetries weren’t understood was substantially reduced. It was one of those moments where the light bulb went on. My understanding, analyzing and trading markets took a quantum leap forward. Markets tend to reverse on a Fibonacci number, Lucas number or over the course of a pattern — some combination of the two. Here are a couple of examples to demonstrate how this works.
How Fibonacci and Lucas Numbers Work
Our first example in chart one is an entire corrective wave in the XAU from November 2004 to May 2005. This chart shows what Elliotticians would call a typical ABC sharp corrective pattern. The first leg down completes in a 55+1 Fibonacci day window. Keep in mind all time windows are (+/-) one day. Then a countertrend wave completes near the 61% retracement. Observe how this leg completes in a 76 (Lucas) day high to high cycle with the top. Finally, the C leg continues down into May and completes in a cluster of 47 (Lucas) days and 123 (Lucas) days for the entire pattern. To trade a leg like this, never front run the bars. Observe how combining the time element with candlesticks keeps you safe. As the trading bounce concludes near the price/time cluster at 61%/76 days, a bearish engulfing pattern gives the sell signal. At the end, a morning star formation signals the reversal. This is a prime example, but Lucas numbers create good setups on the NASDAQ at least twice a week on intraday charts.
But many dispute that markets can be timed at all. Here is an example of the importance Fibonacci symmetries bring to the overall market. These symmetries act as leading indicators that can be anticipated weeks or sometimes months ahead of time. The year 2007 was unique in the fact the bull market was extending into number symmetries seen regularly on intraday charts but only once a decade on a weekly time scale. Working with two important pivots, the September/October period had a rare setup. In early September the major averages were going to be 161 weeks off the August 2004 low and by the end of the month we were entering the 261 week window off the bear market bottom in October 2002. The actual top in 1987 came as a result of being approximately 162 weeks off 1984 low and just missed the 262 week window by one off the 1982 low. The methodology that tracks these symmetries acted as a leading indicator for this setup as early as last April.
Since all time windows are plus or minus one, the weekly frame had a larger than usual margin for error and as we got closer to the actual window four high probability turn dates were identified. The Dow and SPX (chart two) elected the last one (October 12) and turned violently a couple of hours before the close on October 11. These indices topped in the 262nd (Fibonacci extension 2.618) week off the October 2002 bottom. This led to the largest bear phase since the 2000 top and only hit a low as the indices hit the 55+1 day window off the high made on October 31 in the NASDAQ. Keep in mind markets make adjustments for half trading sessions around holidays.
Understanding Fibonacci and Lucas Symmetries
In summary, understanding Fibonacci and Lucas symmetries as a key underlying structure of financial markets gives one a huge edge in trading and forecasting. Candlestick expert Steve Nison states in his materials that once a trader changes over to candles from bars he will never look at a chart the same way again. Candles do provide a language all their own. These number sequences work the same way. Once you begin to uncover their precision, you’ll never look back.
Fibonacci Series
0,1,1,2,3,5,8,13,21,34,55,89,144,233,377,610
Lucas Series
2,1,3,4,7,11,18,29,47,76,123,199,322,521,843
Jeff Greenblatt is a private trader for the past 8 years. He is the author of “Breakthrough Strategies For Predicting Any Market†published by Marketplace Books. He is the director of Lucas Wave International which publishes the Fibonacci Forecaster, a market forecasting service with a circulation of traders and money managers in 17 countries.
Jeff’s technical expertise is Elliott Waves, Fibonacci studies and candlesticks. He has enhanced these methodologies to include The Lucas Series which is closely related to the Fibonacci sequence. Jeff has developed and tested a timing methodology that can be adapted to many disciplines of technical analysis that allows traders and money managers much greater precision on their trading and investment decisions. This methodology is described in the book.
Jeff has written numerous articles and speaks at trading conventions. He is a regular guest on 1510 KFNN Financial News Radio in Phoenix, AZ where he lives. For more information email Fibonacciman@aol.com or visit www.LucasWaveInternational.com.