That post on SOX was good selection, now notice today the post of Brad Ruffins, I would like you to read the following carefully and see how beautifully the concept of retracement based on the great mathmatician Leonardo Fibonacci numbers who was an Italian mathematician born around the year 1170 is explained in a post from ''bull market trends''..very instructive reading..
<<FIBONACCI NUMBERS AND RETRACEMENT
Overview
It is believed Fibonacci discovered the relationship of what are now
referred to as Fibonacci numbers while studying the Great Pyramid of
Giza
in Egypt and by investigating how fast rabbits could breed in ideal
circumstances. Suppose a newborn pair of rabbits, one male, one
female,
is put in a field. Rabbits are able to mate at the age of one month so
at
the end of its second month a female can produce another pair of
rabbits.
Suppose our rabbits never die and the female always produces one new
pair
(one male, one female) every month from the second month on.
The puzzle Fibonacci posed was: How many pairs will there be in one
year?
At the end of the first month, they mate, but there is still one only 1
pair. At the end of the second month the female produces a new pair,
so
now there are 2 pairs of rabbits in the field. At the end of the third
month, the original female produces a second pair, making 3 pairs in
all
in the field. At the end of the fourth month, the original female has
produced yet another new pair, the female born two months ago produces
her
first pair also, making 5 pairs. The number of pairs of rabbits in the
field at the start of each month is 1, 1, 2, 3, 5, 8, 13, 21, 34, ...
The
next number in the Fibonacci sequence is arrived at by adding the
previous
two values together. Thus, to get the next value after 34 add 21 to 34
and arrive at 55. As you can see, Fibonacci numbers are a sequence of
numbers in which each successive number is the sum of the two previous
numbers:
1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, etc.
Now, if you take any two adjacent values and divide each one by their
sum,
a peculiar thing occurs, the values converge to 38.2% and 61.8%.
These numbers also possess an intriguing number of natural
interrelationships, such as the fact that any given number is
approximately 1.618 times the preceding number and any given number is
approximately 0.618 times the following number. The booklet
Understanding
Fibonacci Numbers by Edward Dobson contains a good discussion of these
interrelationships.
Chart Reading
All right, so much for the nice lesson in mathematics, but what's all
this
got to do with stock chart reading? Fibonacci numbers are used in
calculating retracement patterns. Many securities and market indices,
after making long sustained moves in one direction, will eventually
retrace a portion of the move before continuing on to extend it. The
most
popular retracement levels technicians and traders look for are the
38.2%,
50% and 61.8% levels. For example, if on its latest move, a stock went
from 50 to 100 and then started backing off, a 50% retracement would
bring
it to $75 before it turns around and continues its upward march. Most
commercially sold stock charting software packages will automatically
draw
in Fibonacci levels between short, medium, and long term pivot points
using traditional 23.6%, 33%, 38.2%, 50%, 61.8%, and 100% retracement
levels.
Retracements
Fibonacci Retracements are displayed by first drawing a trend line
between
two extreme points, for example, a high peak and the low point in a
trough
or a trough and an opposing peak. A series of nine horizontal lines
are
drawn intersecting the trend line at the Fibonacci levels of 0.0%,
23.6%,
38.2%, 50%, 61.8%, 100%, 161.8%, 261.8%, and 423.6%. After a
significant
price move (either up or down), prices will often retrace a significant
portion (if not all) of the original move. As prices retrace, support
and
resistance levels often occur at or near the Fibonacci Retracement
levels.
For an example of how to apply these retracement levels to a chart,
let’s
take a look at a recent chart of RF Micro Devices (RFMD). The chart
can
be found at the following web link:
bull-market.com
The chart is labeled with a high point of a peak occurring on June 6th,
2000 at a price of $141.50 and a low point occurring on July 27th at a
price of $64.50. The difference between the high and low points is
$77.
For this example, the 38.2%, 50%, and 61.8% Fibonacci retracement
levels
to the upside can be calculated using the formula:
Retracement Level % * (difference between points) + (value of low
point)
as follows.
38.2% Level = 38.2% * $77 + $64.50 = $94
50% Level = 50% * $77 + $64.50 = $102
61.8% Level = 61.8% * $77 + $64.50 = $112
These levels can be watched as price targets or resistance points where
selling may occur or, when calculating levels in the opposite
(downward)
direction, price targets or support points where short covering may
occur.>> |
