Fibonacci Trading

2nd Fibonacci Study

Today we take a look at the past, present and the future of Canadian Dollar.

One year from the August 2002 could be characterized as a conspicuous bullish trend with some retracements. Let's try to use key price points to find out if it was possible to know to which level the initial rally could go up. We will use my favorite trend-following instrument - Fibonacci Extension. Application of this tool manifests itself when "1-2-3" set-up is observed (trend-retracement-continuation of the trend). On the following weekly graph, the move from point "1" to point "2" is an obvious trend; from point "2" to "3" is a retracement. The move from point "3" is the continuation of the trend because the price thrusts through the level indicated by "2". A red color shape is applied to these points with an extension percentage of 23.6. If you look at the graph carefully you will also notice a small retracement between points "1" and "2". It's marked with green and violet circles. These points gave away another two "1-2-3" compositions which I used to draw green and violet color shapes. Extension lines of all three shapes formed an extremely close cluster between price levels of 0.78 and 0.79. Moreover, the green shape was also pivotal in forecasting the price for point "2".

Another variable in the "1-2-3" equation is for point "3" to retrace from "1-2" move by a Fibonacci ratio. It's exactly what happened with Canadian Dollar as it went down 38.2% from the original upward move - strong indication for the original trend extension. Fibonacci Correction is presented in the graph below.

OK, so our commodity reached the level of 0.7863, but was there a steam left to go further? First of all, let's not forget that ridiculously narrow cluster that was not thrusted from both sides - the price entered it but never went through. Second, resorting to classical technical analysis using RSI indicator we can witness a slowly but surely maturing price divergence:

The peak was reached and the bearish trend started. Let's use the very same method we used earlier to calculate how far down this retracement could go. Fibonacci Correction tool was applied to points 1 and 3 and 38.2% level served as a resistance line just like it did before. Two Fibonacci Fan shapes charted against points "1-2" and "1-3" almost had their rays overlapped at the same level of 0.72. Fibonacci Ellipse also indicated a pause to the bearish rally at the same level. 23.6% level of Fibonacci Extension shape (orange color) pinpointed the same level. Confluence of 5 Fibonacci shapes does mean something, the price level of 0.72 is a very significant line that is serving as a resistance right now and will be a prominent support level if penetrated.

Now I will venture a prediction in regards to the future price development. For this I will use Elliott Waves. Throughout almost 5 past years we saw 5 bearish and 5 bullish waves and at this point another formation is developing. What could it be? Are we seeing the first 3 waves of another downward rally or "a-b-c" corrective waves? Also noticing "head-and-shoulders" set-up I would speculate that we are going to see the fourth up wave and the fifth down wave for "1-2-3-4-5" waves formation. Time will tell.

1-st Fibonacci Study

Our laboratory rabbit for today is Webex Communications Inc (WEBX). Let's see if it was possible to predict recent price peak and the following steep decline. Then let's try do make some forecasting.

By taking a look at a daily graph of 9 months worth of data we could observe almost a perfect formation for a Fibonacci Ellipse: trend + counter-trend + continuation of the trend. If we drew the ellipse with Fibonacci ratio 6.854 (one of the most common ratios for ellipses alongside with 4.236), the end of the shape would identify precisely a date when the main trend would be over. Price-wise we would fall a little bit short but still accurate enough for a profitable trade. Of course we could fine-tuned our price estimates with Fibonacci Extensions - ultimate tool for a price forecasting. By identifying major turning points in the price formation we could draw 3 Extensions that formed very narrow (always good sign) Fibonacci Cluster between price levels of 32.21 and 32.76 using most commonly used ratio values for the shape - 38.2%, 61.8% and 161.8%. Note that target lines of the two Extension shapes almost blended together with percentage values of 38 and 62 - perfect Fibonacci Confluence.

We could (and should) do the similar exercise using weekly time frame that spanned more data.

Now let's see if could prepare ourselves to a price decline that happened shortly after the peak. Two Fibonacci Time Projection shapes were drawn on a daily graph against recent valley points. They projected a decline time pretty accurately. Since a downward movement had already started prior to that time it only made sense to wait to see what was going to happen - it would pay us off handsomely.

Another rewarding exercise was to find a Fibonacci Spiral rings of which served as levels of support right until the decline. At that point we got ourselves a resistant level!