Home > Commodities
Fibonacci: From A Buzzword To Real-Life Application
From the proportions of our DNA strand to our galaxy, the Fibonacci ratio defines the natural progression of growth and decay.
Once again, I sit down to talk with Jeffrey Kennedy, editor of Elliott Wave International's Futures Junctures Service, where subscribers get news of daily and longer-term opportunities in commodities.
Vadim Pokhlebkin: Jeffrey, Fibonacci numbers are one of the cornerstones of Elliott wave analysis. In your Futures Junctures Service, you constantly cite for your subscribers various support and resistance levels that you calculate using Fibonacci ratios. I've also seen you use them to project price targets in commodities. Would you say that Fibonacci numbers have served you well?
Jeffrey Kennedy: Extremely well. Technical analysts, in recent years, have elevated “Fibonacci” to the level of a buzzword. Despite this unfortunate fact, in skilled hands, Fibonacci ratios can prove extremely handy when you're calculating a market retracement or price target. The most popular of these ratios are .146, .236, .382, .618, 1.000, 1.618, 2.618, 4.236, 6.854 and so on. Of those, the .618 and 1.618 are the most recognizable even to Elliott wave novices.
Just as a side note, you probably know that the Fibonacci ratio doesn't just exist in the financial markets. From the proportions of DNA strand to the galaxy we live in, it defines the natural progression of growth and decay. One simple example is the human hand, comprised of five fingers with each finger consisting of three bones. That's a Fibonacci 5 plus a Fibonacci 3, which makes a Fibonacci 8. The number 3 is 0.6 of the number 5; and 5 is 0.62 of 8.
VP: It's amazing. I remember first reading about Fibonacci numbers in Bob Prechter's "Elliott Wave Principle – Key to Market Behavior" and feeling absolutely blown away. Have there been any advancements in Fibonacci application recently?
JK: Well, traditionally, the ratios have been used to identify proportions between waves on a chart. You can use these Fibonacci retracements on any time frame (and in any commodity market) to identify potential reversal points. For example, waves 2, B and X commonly retrace .618 of the previous wave. Wave 4 typically ends at or near a .382 retracement of the prior third wave that it is correcting; and so on.
That's the traditional application of Fibonacci ratios – to use the current wave in order to estimate the next one. But a few years ago, I started using use a different approach – "Reverse Fibonacci". It's a technique that uses the previous wave to project the current one. The most significant Fibonacci ratios I have found using this technique are 1.382 and 2.000.
VP: How exactly does Reverse Fibonacci work?
JK: I explain it in more detail in tonight's Daily Futures Junctures (Dec. 02; online now – Ed.), using Live Cattle and Feeder Cattle as example. But in a nutshell, you multiple the previous wave by 1.382 or 2.000 and add the sum to origin of the developing wave.
VP: And does it work?
JK: Oh yes. The example I give in tonight's DFJ (Dec. 02; online now – Ed.) is from early November. Back then, we were looking for the October advance in Live Cattle to be more than fully retraced, and I used Reverse Fibonacci to offer an initial downside target of 85.06. Since then, Live Cattle has indeed sold off, and in doing so, attained that target, 85.06.
VP: How often do you use this technique?
JK: Well, while it has merit, it's not a substitute for the traditional method of calculating Fibonacci wave retracements and projections. However, it has become part of my analytical routine. I explain two specific benefits of Reverse Fibonacci approach in tonight's Daily Futures Junctures. (Dec. 02; online now – Ed.) It's a great illustration of the versatility of Fibonacci ratios and the inherent mathematical nature of markets.
VP: Very true. Thanks, Jeffrey, I learn something new every time we talk.
JK: You're welcome!
RISK-FREE OFFER: Read EWI's latest long-term forecasts for 12+ commodity markets online now – in the new, November Monthly Futures Junctures, edited by Jeffrey Kennedy. Details.