Journal of Technical Analysis - Market Technicians Association

The method puts the emphasis on the middle of the range. We note that in corrections, the cloud is typically close to the classic Fibonacci retracements. (see figure 7)
The main difference is that while the Fibonacci retracements are static, in particular the 50% retracement, which is the mid-point of the move, the cloud will vary as levels
are dropped out of the calculation, and new ones added.
Figure 7. The cloud and Fibonacci retracements. Nymex Natural Gas, September 2007: note how both the cloud
and the 50% retracement stopped the correction.
II - Tests
Testing Methodology:
We used US commodity futures contacts. The ending date for all tests was October 3, 2007. For all contracts, we used equalized continuations, going back 1,000
days from October 3, 2007. The results are theoretical, as the impact of spreads is removed. This can be substantial in commodities. However, this was necessary to
provide a sufficient number of trades for comparison purposes. For simplification, we used continuations based on trading activity. The rollover from one contract to
the next is made at the time of higher tick activity in the next contract. The adjustment (which removes the spread) is the difference between the two contracts at the
time of rollover. The tests assumed no slippage, and no transaction costs were included. (see table 1)
Table 1: Total results
Jo u r n a l of Technical Analysis • 2008 • Issue 65 45