Narach Investment

TECHNICAL ANALYSIS: STOCK PRICES AND THE FIBONACCI STUDIES


It would yet again be prudent for investors to give due regard and weightage to aspects of the Fibonacci studies in conjunction with other technical analysis tools they may be applying to the price volume charts of the stocks they may have under study for investment at a later date and while making decisions with respect to their investments in the stock markets. Fibonacci studies in themselves would revolve around application of a sequence of numbers where each successive number is the sum of the previous two numbers.

This Fibonacci number sequence would be as listed below:

1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, and so on.

It would be of interest to realize that any number in the sequence above is 1.618 times the preceding number and yet again any given number is 0.618 times the following number.

Although, this number sequence was originally applied by Leonardo Fibonacci which studying the great pyramids of Egypt; it has found relevance and substantive application in the study of the price volume charts of stocks traded in the stock markets of today. These Fibonacci studies relevant to stock price analysis with a view to forecasting future trends are the Arcs, Fans, Retracements and Time Zones. Each of these would be briefly described below; with the expectation that the investors would conduct their own study to ascertain whether such studies are relevant to their own investment decision making processes.

The Fibonacci arcs would find their construction in the drawing of a trend line between two extreme points on the price chart of the stock under study; a price trough and an opposing price peak would suffice. Thereafter, three arcs are drawn centered on the second of the two extreme points so that they each intersect the trend line at a Fibonacci level of 38.2%, 50.0% and 61.8%, respectively. The interpretation of which would be in anticipating support and resistance as the stock price approaches these arcs. Some sophisticated investors may apply both the Fibonacci arcs and Fibonacci Fan Lines on the same stock price chart to further substantiate their study of these anticipated support and resistance at the points of the crossing of these two Fibonacci studies.

The Fibonacci fan lines are constructed on the basis of a trend line drawn between two extreme points, which would be a trough and an opposing peak. Thereafter, an invisible vertical line is drawn through the second extreme point; then three trend lines are drawn from the first of the two extreme points so that they pass through the invisible vertical line at Fibonacci levels of 38.2%, 50.0% and 61.8%, respectively. Here the interpretation of the study would be in anticipating support and resistance as the stock prices approach these fan lines.

The Fibonacci retracement is constructed by first drawing a trend line between two extreme points, which would again be a trough and an opposing peak. Thereafter, nine horizontal lines are drawn while intersecting the trend line at Fibonacci levels of 0.0%, 23.6%, 38.2%, 50.0%, 61.8%, 100.0%, 161.8%, 261.8% and 423.6%. The last three would not usually be visible on they would be beyond or off the scale of the stock price chart. Here the interpretation would be in the study of the stock price chart after a significant price up move or down move, as prices would often retrace a significant portion of the original move with the passage of time. As stock prices retrace, support and resistance levels are often anticipated and do occur at or near these Fibonacci retracement levels.

The last of the studies, the Fibonacci time zone would be a series of vertical lines spaced at the Fibonacci intervals of 1, 2, 3, 5, 8, 13, 21, 34, etc. The interpretation of this study would be in seeking out significant stock price changes at or near these vertical lines.

To conclude, the various Fibonacci studies described above would be useful in determining whether a stock price is approaching an expected support or resistance level. As trends do persist and repeat themselves into the future, these studies would have an important place as a stock price or even a market forecasting tool. On the flip side, there would be others who would opine that there are no magic numbers with regard to monitoring and following of these studies; while some sequence series may have worked well in the past, they may not oblige in the future. This would be so, when the market and stock prices are in an uptrend or a downtrend based on fundamental factors both micro-economic as well as macro-economic.