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Wednesday April 29, 2:45 pm Eastern Time
FEATURE--Fibonacci bunnies begat bulls and bears
By Alden Bentley
NEW YORK, April 29 (Reuters) - Forget supply and demand, some traders believe a higher power secures order in unruly financial markets -- nature's law.
For a small but persuasive circle of analysts, the secret of profitable investing was unearthed in the garden of an obscure Italian mathematician seven hundred years before the first tickertape or bar chart.
Meticulously plotting the reproductive cycles of rabbits, Leonardo Fibonacci, of 13th century Pisa, arrived at the number sequence that now bears his name and was known to builders of classical structures long before the descent of the dark ages.
His numeral string appeared to reveal that financial markets were part of God's cosmic design, analysts said.
''Ask any physicist and he'll certainly cotton to that idea and a mathematician will say the same thing,'' said Randolph Donney, research director at Pegasus Econometric Group.
''If you believe there is a grand plan and that there are mathematical constants that will reappear in many different ways within the physical universe, then you'll also believe people act within these types of mathematical parameters.''
ELLIOTT RODE THE FIBONACCI WAVE
To disciples of R.N. Elliott, who authored The Wave Principle some 60 years ago, market gyrations are never random, but come in waves conforming to the ratios embedded in the Fibonacci series: 1,1,2,3,5,8,13,21 and so on to infinity. The sum of any two consecutive numbers equals the next higher number.
After the first four, the ratio of any number to the next highest approaches 0.618. In percentage terms, 61.8 is among the key price retracement targets for modern day traders of currencies, stocks and commodities.
The ratio is otherwise known as the ''golden mean,'' because of its universal applications.
Along with 1.618, 0.382 and a handful of others, the mysterious proportion is visible in everything from snail shell spirals to the architecture of the Egyptian pyramids. Scientists have identified the golden mean in the S-shape of a galaxy and the dimensions of a DNA molecule.
TRADERS, LIKE ANIMALS FOLLOW THE FLOCK
David Allman, research director at Elliott Wave International, said Fibonacci-governed processes affect timing right down to the tiniest structures in the human brain.
Citing wide-ranging publications, Allman argued that human mass hysteria is just a short evolutionary step from the most basic animal instinct -- fight or flight.
Like all but the most primitive fauna, human emotions and motivations are ultimately controlled by a group of subcortical structures in the brain called the limbic system.
''If you want to remember what the limbic system functions are, it is the four fs: feeding, fleeing, fighting and sexual intercourse,'' explained Allman.
Because the limbic system can override rational action, humans are not as superior as they think, ''they just own more stocks,'' he said.
In essence, the Elliott Wave Theory holds that markets undulate in repetitive patterns of five-wave advances followed by three-wave declines. Both five and three are Fibonacci numbers, as is eight, comprising all the waves in the cycle.
Often, these market ebbs and flows also follow a Fibonacci-calibrated clock and calendar, technicians said.
''Examples would be in the stock market: 1974 and 1982 were two important bottoms, that was 'Fibonacci' eight years. From 1982 to the crash in 1987 was 'Fibonacci' five years,'' said Walter Murphy, senior market analyst at Merrill Lynch and Co.
Analysts also noted that the 13-year stretch from 1974 to 1987 was a Fibonacci number. The crash of 1987 seemed concrete proof that markets moved in harmony with some divine scheme.
''You had the biggest crash in history and it stopped within ten points of the Fibonacci number,'' said Murphy, referring to the 61.8 percent retracement of the rally from 1984 to 1987.
A MISPLACED FAITH? AN INEXACT SCIENCE?
Even its admirers admit that Elliott Wave analysis is an imprecise science. Accurate Elliott Wave predictions depend on correctly identifying key peaks and troughs -- a difficult proposition in volatile markets.
''A pure Elliott Wave person would look strictly at Elliott Wave counts,'' said Donney, who does not count himself among the fanatics. ''The problem there is they might have three or four alternative counts and you can't trade three or four alternative counts.''
Allman said his firm, founded by stock guru Robert Prechter, turned bearish on U.S. stocks way too early in the 1980's, seriously mistiming the market top that decade.
''Having said that 'mea culpa', the cyclical picture for 1998 into early 1999 is the same as it was back in 1973-74,'' Allman said.
Allman described the current Wall Street euphoria as a manic-type ''blow off'' seen only every couple of generations. He drew parallels to Japan in the late 1980s.
''These things happen from time to time, that is why they qualify as a mania, and their end is not forecastable,'' he said. ''But we hope to be able to diagnose enough signs to protect people from the aftermath.''
''You heard the same things -- that the economy is wonderful, it's a Goldilocks story -- about Japan back then. Now these guys are sharing pieces of rope,'' said Allman. |
