Fibonacci

If you think baseball fans are freakish over numbers you haven't been locked in a room with an investment analyst. We've all seen the stock charts with colored lines tracing up, down and sideways patterns and an investment analyst is a person who deciphers what this means to an investor and whether or not they should buy or sell a particular stock or index. Charting involves using a significant history of past patterns and making sense of that history to project forward where the analyst thinks the individual stock or the markets will go next. Chartists go as far back in a stock's or index's history to trace a pattern as they are able. There are many books detailing basic charting that the novice can read and learn the basics, but there are so many complex derivatives of charting that only the most experienced chartists is given credibility and that's because he or she also has had a history of being right more times than not.

Getting it right is what it is all about when charting. Making even one small mistake and a chartists can cost a firm millions. if not billions of dollars.

One of the mathematical formulas used by today's investment specialists is something discovered almost 1000 years ago by Leonardo Pisano or Leonardo of Pisa, an Italian mathematician that brought the Arabic disovery of the decimal system to Europeans. He also wrote a book entitles, 'Libar Abaci', and in that title he used filus Bonacci, translated to mean, son of Bonaccio and over time students of his simply morphed his name into Fibonacci.

The basic Fibonacci numbers are a series where the next number is the sum of the previous two: 1,1,2,3,5,8,13 and so on. From this series scientist and mathematicians have derived what they call the Fibonacci Sequence and the amazing quotient of proportions which is known as the Golden Ratio or 1.618. This ratio of 1.618 is natures building block. For example if you divide the number of female honey bees in a hive by the male bees you get 1.618, if you measure your arm from shoulder to finger tips and then divide by the length from your elbow to fingertips you get 1.618. Need more, measure your height and divide by the number from belly button to the floor. If you examine sea shells you'll see the 1.618 relationship between swirls. But more importantly Fibonacci brought to modern technical analysis the golden ration translated into three percentages: 38.2%, 50% and 61.8%. There are other numbers in the sequence but for this discussion we are only interested in the above as they are the significant numbers in an investment market retracement.

And here is why today some chartists are alarmed that the markets are indeed readying themselves for a retracement. The chartists proclaim that historically the markets will retrace down to the next level of support.

This is how it works, if you take any chart of an index or stock and apply the following numbers to it you can see what worries the technicians. The high value is marked at 100, the low at zero and in-between lines of support are drawn illustrating 61.8%, 50% and 48.2%. Fibonacci decrees that retracement is at the next lower level unless that level should fail to hold and then the markets will continue to retrace to the following level. The stock price or index will continue its descent until it finds a level of support for its price or value. The economic tailspin of 08-09 followed the Fibonacci formula exactly, from high to low the numbers and ratios were spot on.

Before you start liquidating all your holdings the analysts are not saying that the markets will falter if they should reach a certain significant number. On the contrary the technicians are not close to calling a Bear market, but when and if it happens, chart from where we are at that moment to the next point on the Golden Ratio and you will see that nature works even in investment markets.