The
Fibonacci sequence’s relationship to the Wave Principle is one of the
most important yet least understood aspects of Elliott wave analysis (for
a brief explanation, click
here).
Elliott
Wave Financial Forecast and
Short Term Update
editor Steven Hochberg often provides subscribers with charts of
potential Fibonacci turn-dates, highlighting days in which a market may
experience a reversal of its current trend. In the June issue of the Financial
Forecast, Steve explained
how a cluster of Fibonacci turn dates was pointing to the time period of
June 5-7 for a potential change of trend in the Dow Industrials.
Read the recent interview
below to learn more on how Elliott analysts use the Fibonacci sequence
and why this latest chart was so significant.
Steve,
why is the Fibonacci sequence important and how do Elliott wave analysts
use it in their forecasts?
The
Fibonacci sequence is basically nature’s pulse – a basis for most
everything found in the Universe. It’s the road map for progress and
regress. You find the numbers and the ratios almost everywhere, and
R.N. Elliott discovered that the sequence is also found within market
movements.
In
highly charged emotional markets, crowd psychology often displays
sharp impulsive patterns. Sometimes in price, sometimes in time and
sometimes both. We use the Fibonacci sequence to help determine wave
lengths (price relationships) and to count days between market highs
and lows (time relationships). Time relationships are not as hard and
fast or frequent as price relationships, but in emotional markets such
as now, you tend to see them more often. And when you do see a
progression, you better pay attention because they often have an
important meaning.
What
made this particular chart so unique?
For
almost the whole of last year, every significant market turn in the
Dow was related to another by a Fibonacci number of days. The
progression showed a strong confluence coming together in the tight
window of June 5-7 [Editor: see chart below].
That
cluster had so many turn-dates converging on this one period that odds
were high it would mark a significant turn. I’ve rarely seen a
cluster come together like this. In my judgment, the market was trying
to tell us to pay close attention because this would be a very
important time period.
What
was going on in the markets leading up to that time period?
June
2 (Friday) ended a tumultuous week for the market. The Dow was up 4.9%
and the NASDAQ Composite 19% -- its single best week in its 29-year
history. It was ascribed by the fundamentalists to a less than
expected employment report released that Friday – people thought
that because of it there’d be no more interest rate hikes. Hence,
most thought the low was in for the Dow and it was poised to rally and
test its all-time high.
So
what did you tell subscribers about this chart and what it meant?
One
of the things about using the sequence as a time indicator is that it
won’t tell you if a turn is going to be a low or a high. But
whatever direction the market is headed in moving into the time
window, it will usually move in the opposite direction coming out.
This is why in The Elliott Wave Financial Forecast (published May 26)
we said, “If the market is rallying into this June 5-7 period, look
for it to mark a high.” In the Short
Term Update of June 2, we reiterated this outlook and told
subscribers to let the waves play out through the Fibonacci time
window.
What
happened?
Following
that huge week, the Dow topped on Monday, June 5, at 10,863 – right
in the window [Editor: see chart below]. Since then it’s continued
to steadily decline, printing a series of lower lows and lower highs.
Right now it’s just above 10,400, which is approximately a 75%
retracement of the 604-point rally that led up to the turn-date.
Like
you said, while turn dates can indicate a major move is imminent, it
won’t give you a definite direction of the market. So what does an
analyst gain from it?
Because
there were so many clusters in this very specific time window, that
high of 10,863 carries added weight. In essence, 10,863 can act as a
“stop” for the wave count. Sometimes knowing at what specific
point your analysis will be wrong is almost as important as knowing
when you’re right. It allows you to define a risk level for your
stance, which in turn increases your confidence. An Elliottician
doesn’t base his analysis solely on Fibonacci relationships, but
they provide a valuable tool to help fashion a forecast.
Report
courtesy of Elliott
Wave International.
Elliott
Wave Reports Index
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