Fibonacci time cycles

In the previous trader's corner we had skimmed through the basics of the Fibonacci series, Fibonacci ratios and how Fibonacci retracement lines can be used to find supports and resistances .

Another popular use of these numbers is in projecting the time that any move can take. While there are various technical tools available to forecast and project price, tools for projecting time are abysmally small. This lack of enthusiasm in the technical analyst fraternity towards predicting time has perhaps something to do with the relatively lower hit rate.

Some analysts make use of the Fibonacci time-lines to identify the time at which a move can end. These time-lines are fairly easy to draw on any technical analysis software. The first step is to identify a major trough or a peak. This will be the point where the first line will be drawn. Subsequent lines are drawn at intervals corresponding to the numbers in the Fibonacci series, 1, 2, 3, 5, 8, 13 and so on. The sessions that fall on any of these lines are likely to be reversal points for a move. It is enough to use this tool on the benchmark index since most stocks form significant troughs and peaks along with the market index. If we draw the Fibonacci retracement line from the March 6, 2009 low on the weekly chart of the Sensex, the findings as shown in the attached chart are simply amazing. The November 12 peak of 21,076 occurred exactly on the time line with 34 weeks difference.

As we all know, a significant peak has been formed here. So the next line will occur 55 weeks later, that is, towards the end of November 2011. It is to be seen if a major reversal occurs at that point!

Another method employs Fibonacci ratios for projecting time. This is done by multiplying the number of sessions that a move has consumed by the ratios – 0.236, 0.382, 0.618, 1 and 1.618 and adding it to the ending point of the move to arrive at the time when the next up or down move can be spread over.

To explain with an example, let us assume that stock A completed an up-move from Rs 15 to Rs 200 in 50 sessions. To calculate the time that the next correction will take, we need to multiply 50 by the Fibonacci ratios given above, 0.236, 0.382 and so on. An adjustment can be made to account for the five-day week in stock markets by multiplying the product by 7/5. Now add this number to the date on which the move ended to arrive at the dates on which a reversal can occur.

I have personally not been able to use these tools with a great degree of success but it is always fun to play around with some new tool. Some analysts recommend using time and price targets together. It is said that when these two coincide, there is a greater probability of a significant trough or peak forming at that juncture, as was the case with the November 2010 peak. Again it is said that dates that are Fibonacci numbers such as 2, 3, 5, 8 and so on can also begin a significant move .

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