Fibonacci and Gann Applications in Financial Markets

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3 Other Applications of the Fibonacci Retracements and Extension A look at what price action is (the graphical and financial outcome of the attrition between buyers and sellers) and what drives market action (fear and greed, the two main forces in price action). So far we have looked at vertical retracement using Fibonacci relationships. There are other interesting tools, which are based on some of the same Fibonacci values. This chapter will introduce them in some detail while later chapters will look at some of the common errors in applying these methods and some of the drawbacks. It is unfortunate that there are no hard and fast rules as to the application of some of these patterns, as sometimes they will work out fairly well and sometimes be totally useless. In Chapter 8 on ‘Total Analysis’ some ways around this will be discussed. For now, this chapter will look at a cross-section of asset classes and try to identify if and more importantly when fanlines, arcs and timelines should be applied. It is not as simple as in the case of vertical application seen in the previous chapter, as the addition of an element of time adds some key differences and indeed problems to the analysis. Vertical retracement patterns are the most commonly used Fibonacci patterns in technical analysis. They are easy to construct both by hand and proportional divider and on screen. They remain useful as long as the price action is within the pattern no matter how much time has elapsed. However, there comes a stage, especially when the price construction starting values are within a move or correction rather than at historical high and low, when the pattern falls out of use. That
28 Fibonacci and Gann Applications in Financial Markets usually comes once either the 100% or 0% retracement levels have been penetrated, but could also come if the price moves sideways for some considerable time and even more so if the price starts to form a continuation or reversal pattern, such as a triangle or flag in the case of a continuation and Head and Shoulders in the case of a reversal pattern. The vertical retracements discussed in the preceding chapter are simply constructed using extremes of a price move, i.e. the origin and the ultimate price extreme of a move. There is no difference in this vertical measure whether the move took only a matter of days to complete or weeks or months. The timing of the retracement move is of little importance in this case as the analyst is focused on the general move itself. This is not the case with those tools that have time attached. The vertical retracement pattern is a fairly scientific application and falls or succeeds on whether the analyst has used it appropriately. In this chapter we shall see that the ‘artistic’ addition of fanlines, arcs and more importantly timelines is not so clearcut. Indeed, there are problems and key issues raised in this and succeeding chapters that will call into question the appropriateness of some of these patterns throughout the life of the asset. It will be shown that while the pattern works in some asset classes, it fails in others, and indeed in those markets where it does work, it may not work for very long. This is the application of the art of technical analysis, being able to tell when a pattern has ended its usefulness. In my professional career as a technical analyst I have used fanlines frequently but tend not to use them too much as support and resistance levels in themselves. I much prefer to use them for support and resistance while the price or yield is within the pattern and when the price is far from the fanline, using it as a rough measure of the sentiment behind the move. If the price is moving roughly in parallel with the 38.2% pattern I am content, but when it moves steeper and indeed more importantly shallower than the 38.2% fanline then I have cause to get excited. Moving steeper shows a change in sentiment as the primary move has gained further participants, i.e. the group goal has attracted further converts. This is encouraging for analysts and makes forecasting a little easier. I would then apply further more traditional tools, such as momentum, to my analysis. In the case where the price is moving shallower than the 38.2% fanline it marks a change in the group dynamic; the participants are no longer confident in the original goals. It is critical that the analyst be aware of the group dynamics of participants within the marketplace. Where is the current price relative to a cycle or, more clearly, where is the price relative to an Elliott wave pattern? This latter position is clearly much more important than is realised. Many fans of Elliott wave theory are content to have a wave count and feel confident in it without looking at the bigger picture, i.e. what the sentiment changes are at each stage of the wave. The rules of Elliott wave theory are relatively straightforward – five up, three down – but each part of this eightwave pattern is the result of major changes within the overall group dynamic. I spent many years working with an exponent of Elliott wave theory in whom I had extreme
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Page 6 and 7: Contents Preface ix 1 Introduction
Page 8 and 9: For Angus and Jenny for all the ski
Page 10 and 11: Preface Technical analysis is not a
Page 12 and 13: 1 Introduction to and History of th
Page 14 and 15: Introduction to and History of the
Page 16 and 17: Introduction to and History of the
Page 18: Introduction to and History of the
Page 21 and 22: 10 Fibonacci and Gann Applications
Page 40 and 41: Other Applications of the Fibonacci
Page 52 and 53: 4 Charting and Difficulties: A Hist
Page 54 and 55: Charting and Difficulties: A Histor
Page 66 and 67: 5 Common Errors in Application of F
Page 68 and 69: Common Errors in Application of Fib
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7 Application and Common Errors in
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Application and Common Errors in Fi
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11 Conclusion The application of Fi
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Conclusion 195 and I believe this i
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Conclusion 197 watching it develop
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Conclusion 199 created by futures e
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Conclusion 201 Gann analysis, where
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Appendix 2 Glossary of Common Terms
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Glossary of Common Terms 217 Month
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Glossary of Common Terms 219 Englan
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224 Index commodity markets, 12, 17
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226 Index Gann theory (cont.) probl
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228 Index pi, discovery, 1-2 pit tr
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230 Index ‘V’ bottoms/tops, 15-
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Fibonacci and Gann Applications in Financial Markets

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