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FIBONACCI ANALYSIS Related titles also available from Bloomberg Press BLOOMBERG MARKET ESSENTIALS: TECHNICAL ANALYSIS Fibonacci Analysis by Constance Brown DeMark Indicators by Jason Perl Option Strategies for Directionless Markets by Anthony J. Saliba with Joseph C. Corona and Karen E. Johnson Trading Option Greeks by Dan Passarelli Breakthroughs in Technical Analysis edited by David Keller Trading ETFs Gaining an Edge with Technical Analysis by Deron Wagner New Insights on Covered Call Writing by Richard Lehman and Lawrence G. McMillan New Thinking in Technical Analysis edited by Rick Bensignor A complete list of our titles is available at www.bloomberg.com/books Attention Corporations This book is available for bulk purchase at special discount. Special editions or chapter reprints can also be customized to specifications. For information, please e-mail Bloomberg Press, [email protected], Attention: Director of Special Markets, or phone 212-617-7966. FIBONACCI ANALYSIS Constance BROWN BLOOMBERG PRESS NEW YORK © 2008 by Aerodynamic Investments, Inc. All rights reserved. Protected under the Berne Conven tion. Printed in the United States of America. No part of this book may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher except in the case of brief quotations embodied in critical articles and reviews. For information, please write: Permissions Department, Bloomberg Press, 731 Lexington Avenue, New York, NY 10022 or send an e-mail to [email protected]. BLOOMBERG, BLOOMBERG ANYWHERE, BLOOMBERG.COM, BLOOMBERG MARKET ESSENTIALS, Bloomberg Markets, BLOOMBERG NEWS, BLOOMBERG PRESS, BLOOMBERG PROFESSIONAL, BLOOMBERG RADIO, BLOOMBERG TELEVISION, and BLOOMBERG TRADEBOOK are trademarks and service marks of Bloomberg Finance L.P. (“BFLP”), a Delaware limited partnership, or its subsidiaries. The BLOOMBERG PROFES SIONAL service (the “BPS”) is owned and distributed locally by BFLP and its subsidiaries in all jurisdictions other than Argentina, Bermuda, China, India, Japan, and Korea (the “BLP Countries”). BFLP is a wholly-owned subsidiary of Bloomberg L.P. (“BLP”). BLP provides BFLP with all global marketing and operational support and service for these products and distributes the BPS either directly or through a non-BFLP subsidiary in the BLP Countries. All rights reserved. This publication contains the author’s opinions and is designed to provide accurate and authoritative information. It is sold with the understanding that the author, publisher, and Bloomberg L.P. are not engaged in rendering legal, accounting, investment-planning, or other professional advice. The reader should seek the services of a qualified professional for such advice; the author, publisher, and Bloomberg L.P. cannot be held responsible for any loss incurred as a result of specific investments or planning decisions made by the reader. First edition published 2008 1 3 5 7 9 10 8 6 4 2 Library of Congress Cataloging-in-Publication Data Brown, Constance M. Fibonacci analysis/Constance Brown. p. cm.—(Bloomberg market essentials) Includes bibliographical references and index. Summary: “Fibonacci Analysis gives traders a first step toward applying Fibonacci analysis in the market. The book covers key elements of this technical analysis tool. Traders will get up to speed quickly on its unique benefits. The major ratios between numbers in the Fibonacci sequence describe predictable market patterns. Fibonacci analysis analyzes these movements to identify future market prices”—Provided by publisher. ISBN 978-1-57660-261-4 (alk. paper) 1. Investment analysis. 2. Speculation. 3. Fibonacci numbers. I. Title. HG4529.B762 2008 332.63'2042—dc22 2008021539 Geometry has two great treasures: one is the theorem of Pythagoras; the other, the division of a line into extreme and mean ratio. The first we may compare to a measure of gold; the second we may name a precious jewel. — Johannes Kepler (1571–1630) Contents List of Illustrations ix Acknowledgments xiii Introduction xv 1 The Mystery of Phi (1.618) and phi (0.618) 1 2 The Concept of Market Expansion and Contraction 15 3 Support, Resistance, and Price Projections 43 4 Bridging the Gap Between the Nautilus Shell and a Market Chart 61 5 Fibonacci Channels, Angles, and Cycles with Oscillators 77 6 Fibonacci Expansion Targets and Confluence in Time 105 7 Rhythmic Wave Diagrams 137 8 Harmonic Unity Within Market Price and Time 143 Appendix A 163 Appendix B: Common Errors 165 Selected Bibliography 171 Index 177 vii List of Illustrations Figure 1.1 Hurricane Isabel 2 Figure 1.2 The Golden Ratio 3 Figure 1.3 Woman Teaching Geometry 1309 5 Figure 1.4 Nasdaq Composite Index Monthly Chart 10 Figure 1.5 Leonardo Fibonacci—(Leonardo da Pisa), by Giovanni Paganucci 11 Figure 2.1 Iceland Low 15 Figure 2.2 The Golden Ratio Proportions 19 Figure 2.3 Caterpillar—Weekly Chart 20 Figure 2.4 Caterpillar—Weekly Chart 22 Figure 2.5 Nautilus Pompilius Shell Compared to the Golden Spiral 24 Figure 2.6 The Nautilus with the Golden Spiral 25 Figure 2.7 Caterpillar (CAT)—Weekly 27 Figure 2.8 Centex Weekly Chart 28 Figure 2.9 Centex Weekly Chart 30 Figure 2.10 Centex 3-Day Chart 31 Figure 2.11 Centex 3-Day Chart 33 Figure 2.12 Centex 3-Day Chart 34 Figure 2.13 Centex 3-Day Chart 36 Figure 2.14 Centex 3-Day Chart 38 Figure 2.15 Centex 3-Day Chart 39 Figure 2.16 Centex 3-Day Chart 40 Figure 3.1 Centex 3-Day Chart 44 Figure 3.2 Centex 3-Day Chart 47 Figure 3.3 Centex 3-Day Chart 49 ix x List of Illustrations Figure 3.4 Centex 3-Day Chart 50 Figure 3.5 Centex 3-Day Chart 51 Figure 3.6 Centex 3-Day Chart 53 Figure 3.7 Centex 3-Day Chart—Creating Fibonacci Expansion Price Targets 55 Figure 3.8 Centex 3-Week Chart—Longer-Horizon Data 56 Figure 3.9 Centex 6-Month Chart—Short Time Horizons with Long-Term Market Implications 59 Figure 3.10 Galaxy Messier 101, Hubble Image: NASA and ESA, February 28, 2006 60 Figure 4.1 Map of Mesopotamia 62 Figure 4.2 The Tablet of Shamash 63 Figure 4.3 Phi Relationships 65 Figure 4.4 The Colosseum in Rome 67 Figure 4.5 Example of a Correctly Set Proportional Divider 68 Figure 4.6 Right-Angle Measurement for Proportional Dividers 69 Figure 4.7 Golden Spiral Geometry 73 Figure 4.8 The Great Pyramid of Khufu 74 Figure 5.1 China Shanghai Composite and Australia All Ordinaries Indexes 78 Figure 5.2 Australian SP/ASX 200—Weekly Chart 81 Figure 5.3 Australian SP/ASX 200—Weekly Chart 84 Figure 5.4 Australian SP/ASX 200—Weekly Chart 85 Figure 5.5 Australian SP/ASX 200—Future Price Swings Using a Proportional Projection 87 Figure 5.6 Australian SP/ASX 200—Finding the Significant Confluence Zone 88 Figure 5.7 Australian SP/ASX 200—Creating a Future Price Projection 90 Figure 5.8 Australian SP/ASX 200—3-Day Chart 93 Figure 5.9 Australian SP/ASX 200—3-Day Chart 96 Figure 5.10 Australian SP/ASX 200—Fibonacci Time Cycles 98 Figure 5.11 1897 Dow Jones Rails and Industrials Chart 100 Figure 5.12 Australian SP/ASX 200—3-Day Chart—Fibonacci Angles 102 List of Illustrations xi Figure 6.1 10-Year Japanese Government Bond—2-Month Chart 106 Figure 6.2 10-Year Japanese Government Bond—2-Month Chart 107 Figure 6.3 10-Year Japanese Government Bond—2-Month Candlestick Chart 112 Figure 6.4 10-Year Japanese Government Bond—2-Month Chart 115 Figure 6.5 EUR/USD—2-Month Chart 116 Figure 6.6 EUR/USD 2-Month Chart—Confluence Zone Price Projection 117 Figure 6.7 Advanced Application of Fibonacci Angles 119 Figure 6.8 EUR/USD 2-Month Chart 122 Figure 6.9 Ford Motor Company Weekly Chart—Price Internals 123 Figure 6.10 CBOT Wheat Futures 1-Week Chart 126 Figure 6.11 30-Year U.S. Treasury Bond Futures—5-Week Chart 128 Figure 6.12 COMEX Gold Futures 130 Figure 6.13 Hong Kong WEB (EWH) 2-Week Chart 133 Figure 7.1 Nautilus Shell Geometry 138 Figure 7.2 Frog Skeleton with Rhythmic Wave Analysis 140 Figure 8.1 Centex Corp. (CTX) 2-Week Chart—Arithmetic Proportion 144 Figure 8.2 Geometric and Harmonic Proportions 146 Figure 8.3 Musical Intervals Expressed as String Length Ratios 147 Figure 8.4 S&P 500 Futures Respecting a Harmonic Perfect Fourth and Perfect Fifth Interval 151 Figure 8.5 S&P 500 Futures—Combining Harmonic Ratios 153 Figure 8.6 Rhythmic Wave Diagram 155 Figure 8.7 Ulam Spiral 156 Figure 8.8 Ulam Spiral Pattern—Prime Number Pattern 157 Figure 8.9 Ulam Spiral Pattern—Subset of Primes 158 Figure 8.10 Sunflower Head 159 Acknowledgments Fibonacci analysis is a personal passion of mine, and I would like to thank the entire team at Bloomberg Press—including David George, JoAnne Kanaval, Dru-Ann Chuchran, and Leah Shriro—for raising the quality bar to the highest standard possible. My special thanks go to Stephen Isaacs. With each book we’ve done together, my trust in him grows. Another important part of the team behind this book was Market Analyst Software, the Australian software vendor that has developed features and tools to push this subject past industr y conventions. I would particularly like to thank Jonathan Garrett and Matthew Humphreys, who have struggled through many versions of the software develop ment process to support my many requests. None of this would be pos sible without the support of the company’s founder, Mathew Verdouw, who is committed to creating a revolution in technical analysis.