By: The Stock Jock! (Head Trader and Host of BigPlayStocks.com)
Hello Stock Fans!
"Fibonacci-ly"; is that some new word SJ has made up, or has he really lost his marbles after the NASDAQ's most recent sell-off? Is he grasping at straws, using some kind of new pizza to explain the NASDAQ? Funny, but NO. It is, in fact, quite the contrary.
The NASDAQ is YES, "Fibonacci-ly" speaking, a great buy at current levels. Well, I am sure the question you are asking now is, "what in the world is Fibonacci-ly?" and, "what's it got to do with stocks?"
Well, to answer that, let's first drop my cleverly added "-ly" from the end of the name, and get back to "Fibonacci". Now that we have it right, we'll turn the history book back and examine the great "Fibonacci" himself. Yes, he was a person!
Fibonacci, "filius Bonacci", or more formally, Leonardo Pisano, was called the "greatest European mathematician of the middle ages". He lived from 1170 to 1250 and gave name to the number sequence {1, 1, 2, 3, 5, 8, 13, 21...}, the "Fibonacci numbers". Each of these numbers is the summation of the last two repeating the ratios between them (0.382, 0.50, 0.618, 1.0, 1.618, etc.). Fibonacci did not care about the price change, however, he merely regarded the series as a solution to a mathematical problem he introduced in his book for readers to practice the arithmetic, quite trivial example, from the first sight of view. "A pair of rabbits are put in a field and, if rabbits take a month to become mature and then produce a new pair every month after that, how many pairs will there be in twelve months time?" Today we know that these numbers have a close relationship to the amplitudes and target prices of the price changes. While it can hardly be exact in and of itself, the market prediction based purely on Fibonacci numbers, "Fibonacci Analysis", leaves enough value to warrant attention.
So, now that we have a better idea of the Fibonacci sequence, how can we relate it to stocks?
Definition: Fibonacci Retracements:
Fibonacci retracement is a simple analysis based on Fibonacci numbers. From the latest high and low levels, one may expect the "come-back" of price to some levels preset by the magic numbers 0.382, 0.50, 0.618, 1.618, and so on. To calculate these theoretical prices, determine the high and low and specify whether the retracement is bullish or bearish. The Fibonacci calculator finds Fibonacci levels from a given pair of high-low prices. If the statistical model is not chosen, the latest statistical parameters will not be retrieved from the server and the probability of Fibonacci levels will not be output.
Fibonacci numbers have a close relation to maximal probability in price distribution. It is surprising that these maxima usually fluctuate around 61.8%, (SEE HOW HUGE A RETRACEMENT 68.1% IS) evidently depending on i) traded currency and ii) development of the market.
Statistically speaking, the dispersal of Fibonacci levels over nominal values is plus/minus 5%. That's when the price retraces to/from the area 61.8 +/- 5%. The margin usually required for the intraday trades is 2%.
How Are Fibonacci Retracements Currently Defining The NASDAQ?
Current NASDAQ Fibonacci Retracement Values:
Range: 2251.00-2892.00 = (641.00 Points)
2892.00 (January 30, 2001 High)
38.1% (244.00) = 2647.00
50% (320.50) = 2571.50
68.1% (436.50) = 2455.47
2251.00 (January 3, 2001 Low)
The NASDAQ's current Fibonacci ranges (areas to measure the top and the bottom) are currently the Jan 3, 2001 low of 2251.00, and the Jan. 31, 2001 high at 2892.00. The NASDAQ's most recent low this past Friday (02/09/01) was exactly a 68.1% Fibonacci Retracement of its year low and high. More amazing than that, the NASDAQ closed on Friday at 2471.00, at exactly a 50% retracement of 2251.00 and 2892.00.
To further define the NASDAQ's current relation to Fibonacci Retracements, let's look closer at a key sentence from the definition. "Fibonacci levels over nominal values are plus/minus 5%. That's when the price retraces to/from the area 61.8 + 5%. This is for the leverage trading "
What's key about that statement is that the NASDAQ was at 68.1% retracement at its low on Friday (2455.00), and moved up from there to close at 2471.00, a 50% retracement! Now you can [see how huge 68.1% is (2455.00)]. Move over it by a 5% + ration, you get 2487.00. These values work in descending fashion; -5% of the equation is 2423.00, less than 50.00 points below Friday's final reading. The previously mentioned 2487.00, even though it's up in the NASDAQ range, would act as the - 5% part. In other words, the NASDAQ should not go any lower than 2423.00, and then it should trade up on increasing volume to 2455.00, and gain volume again at 2487.00. Finally upon breaking 2555.00 (100 points over 68.1% or 10% over 2 x 5% range), the NASDAQ should (in accordance to Fibonacci trading theory) define its bottom after a break over 2555.00!
Fund Managers Often Buy Off Of Fibonacci Retracements.
Finally in Closing, this powerful way of measuring stocks ranges after a defined low, and then a strong up movement has been a measuring stick for as long as the NASDAQ has been in existence for buying and selling stocks. The fact that several blocks of key technology stock went past the NASDAQ tape at under 2471.00, and over 2455.00, could very well indicate that 2455.00 was indeed the level that Fund Mangers were waiting for. It's also quite common with good news (and the Fed's latest rates cuts are good news) for an index to retrace just over 2/3's of its recent gains. That's why 68.1% is key! Often the markets speak to us, and tell us key bits of information in the way they trade. If that's the case currently, and quite frankly I believe it is, then without question, "Fibonacci -ly" speaking, the NASDAQ seems to be saying loud and clear, "Buy Me!"