The Magical Fibonacci Numbers and Proper Use

Overview:

Bitcoin continues to look for direction and the overall crypto space has been quite lack luster, other than the Tron Airdrop.  There is some news in the market, but the sentiment is about as high as mom calling you home for a spinach and liver dinner.  Just not exciting at all, and you rather eat over at your friends house.

When we started our radio / podcast we looked to provide more than just current events or recent happenings.  In addition to trades and investment ideas we wanted to provide an educational value to the show.  This week we went over Fibonacci Retracement Numbers, what they imply, and how to use them correctly.

This is a follow up to the podcast which you can listen to here “The Truth About Fibonacci Levels”.

History:

Leonardo Bonacci is considered the father of Fibonacci, and a math genius during the early 1200’s.  Initially he looked to find a mathematical sequence for the population growth of rabbits.  Yes the tool we used today is based on the mating of rabbits.  This may not seem important to us, but if you are a rabbit farmer it helps in determining your potential future supply allowing you to calculate and estimate your rabbit yield, costs, and potential profits.

However, this sequence is also found in other natural occurrences such as trees on a limb, or body parts on a human.  So is there some mystical magical meaning to these numbers when it comes to charting?  Not really, but it does provide perspective on where to look for reversals.

You can google Fibonacci and the golden ratio for more information if you want, but like Elliott Wave and other methods, they should be taken for what they are worth, a perspective on the market, not a crystal ball indicator.

Apple Monthly

Application in Charting:

One of the first tools that many traders use is Fibonacci levels.  It is one of the more simple tools to use, and can quickly be put on a chart, but what are those levels telling us? Lets take a look at an example using one of my favorite stocks, Apple.

This is a long-term monthly chart of Apple where there are four distinct up-trends in the stock.  With the recent correction in the market we want to look for potential areas where a bullish reversal may take place, but where would we start?

This is where the retracement tool comes into play.  Just looking at a chart we have no sense or gauge of the depth of the market other than previous highs.  In addition what the market did back in 2003 is really not indicative of what the market will do now.  So let’s focus in on the final bullish swing that started in 2016.

Apple Weekly:

Using the Retracment Tool

The swing from 2016 to 2018 was 145 points.  Though long-term moves are based on fundamentals, shorter term moves are generally irrational and based on market sentiment.  Like anything else in life people in general love a deal, or at least the thought they are getting one.  We see this all the time with 50% off sales which are really not 50% off but the market perception is “I’m really getting a deal here”.

Same goes in the stock or any other market for that matter.  The retracement tool provides us a measurement of how much a stock is “on sale”.  Now there are more uses for it than this, but as a basic overview that is what we are measuring. Levels of discount pertaining to a certain move.

From the chart we see Apple reversed right at the 68.7% retracement of the overall move.  In order to understand what this implies we first need to understand the calculation.  So here is the math.

Retracement Level =  Price high – Point Swing x 0.687  In Apples case we have:

235 – (145×0.687) = 235 – 100 = 145  The 68.7% retrace of the swing is 145. Boom Apple nailed it, must be magical.

Now I rounded up for the sake of this example, but this is what the retracement tool is measuring. So why is this valuable or more valuable than saying Apple is 40% off its all time high?  It is not really and they lead to the same result, I am getting a discount here.  This is really where the psychology of the market comes into play, and there is nothing magical about it.

Whenever anything good goes on sale buyers line up.  Look at the line at BestBuy during Black Friday. So if an equity is 40-50% off we should see buyers step in if it is a deal.  After all if someone liked Apple at 200 they should really like it at 145 right?  If the market does not like it at 50-60% off, than it may be a sign something is wrong.  So we look for other indicators as well but this is a start.

So lets change it up a bit and see if other numbers work. Lets use the third scale.

Apple 1/3 Scale

Mixing It Up

Again we can get the same perspective of the discount of an equity based on this scale as well.  Buyers stepped in just above the 67% retracement level.  Sure it did not hit the level exactly and it did hit the 0.618 retracement but is this just a random event.

Lets back it up one bullish trend from 2013 to 2015.

Apple 2013 to 2015

Previous Swing

Well here it fell about midway between the 0.5 and 0.618 retracement levels.  I am not going to do it here, but if you have nothing to do, you can spend a couple days and find out for yourself.  Actually there has been some research on this and they are no more relevant than any other random numbers.   What we are gaining is a perspective of where we can expect buyers to step in.  Again it is not as easy as clicking buy at the 61.8% retracement level, if it were, this would be quickly programmed and everyone would be making money.

Summary:

Fibonacci retracements are a useful tool to gauge area where we can look for a reversal.  They are not magical, and those claiming to have secret levels are simply fibbing.  Like anything else we all have our special levels that we come up with over time.  Both Marc and I have levels we do not post about, which are simply levels we have found over time give us a better gauge of markets, based on how we look at things.

Many people have their own, and you will likely develop your own set of “mystical” numbers which you favor over others.  It is also important to understand the indicator(s) you are using, what their application is, and not fall into blindly using them as crystal balls.  There are no crystal ball indicators and those preaching they have them are simply false profits.

Nobody would give their goose that lays golden eggs away, they are likely selling you beach front property in Arizona.

Next week on our podcast we have a special guest coming in Steven Lubka Blockchain Network Architect and Cryptocurrency Analyst.  One of the great minds in the space today.

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