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This weekend has still been very much in "Mind-Whirling" mode. I have also been in constant contact – in person, on the phone, and via email – with a variety of folks from the trading world – – all of them whip-smart, and all of them as bewildered at the market as me. It's comforting to know that I'm not the only one scratching a valley into my scalp.
Since 90% of my invited guest writers seemed to have skipped town, and the only 10% contribute every now and again (which I appreciate, believe me), I am sometimes feeling a bit short on material: particularly on a Sunday morning, when I emptied my modestly-sized noggin out the prior day..But I landed on one interesting item I've noticed, which is the extremely long-term Fibonacci Fan lines on the S&P 500.
I've drawn a couple of them, both of them starting July 8, 1932 (yep, nearly 80 years ago) and ending on March 24, 2000 (for one) and October 11, 2007 (for the other). The lines, over the decades, have been amazing guideposts for market action. For instance, during the 70s:
……..in the late 80s and early 90s……..
So what does it tell us today? Well, the S&P seems to be facing off with two of these levels. As you can see in the chart below (and take note how, last March, it bounced beautifully off the 61.8% line) we are just about precisely at one of the fan lines (suggesting a resistance level) and about 75 points away from another fan line (from the other series).
So what this tells me is that, unless we get some weakness almost immediately, we're in for about another 75 S&P points on the upside, coinciding with very late March/very early April (which kind of plays well into the "people will start selling for tax reasons in March" scenario).
Although
the backbone of our analysis is NOT based on fibonacci numbers or
anything conventional, our analysis and comparison of 1937 vs 2007
produced uncanny results.
In 1937, DJI peaked at 194.4, bottomed at 98.95 and subsequent bear
market rally peaked at 158. So it dropped 95.45 points from peak to
bottom. Of this, the bear market rally regained 59.05 points
(158-98.95). The ratio of retracement 59.05/95.45 = 0.6186. For those
of you who are not aware of the principles of Fibonacci and its
application in trading, Fibonacci numbers are numbers where each one is
the sum of the previous two numbers. Read below for more details on
Fibonacci numbers. We arrived at this ratio inadvertently, without even
realising the significance of 0.618 until it was pointed out to us.
Coincidental? Perhaps.
Regardless, we applied the same Fibonacci ratio to the current rally
in an attempt to see where this rally will peak. Based on the same
Fibonacci ratio, a peak of 11255 will produce the same retracement as
1937. This has to be a closing price, which means the high of the day
will probably hit 11300 for those trading with a sniper rifle (we prefer the shot gun approach!).
We are concern enough to scale back some of our additional shorts
opened Friday, to provide sufficient firepower to short 100% at 11300.
11300 appears high enough to wipe out the remaining bears in our camp
and provide the undoubted confidence in bulls. This would fit with a
"blow off" top we have been talking about. We will take the little
profits we have from our S&P shorts opened Friday. Also will look
into the weekly (or monthly if available) Binary Index trade for 11300
as insurance.
We have a busy weekend ahead so we will rush this analysis to print. We will add more to this as time permits so do check back.
Why compare 1937 with 2007 ?
For new readers, our attention focused on 1937 after we compared all
previous significant bear markets since 1929 and the Nikkei's 1989
(because of the similiarities in monetary policies quoted by many eg
"Mish" Mike Shedlock) – and found that 1937's chart looked identical to
the current. Check the full post here.
We then zoomed in on 1937 after noting the striking resemblance and compared with the current decline in more detail here.
We were not sure though, whether the current rally equivalent was at
point A or B (see below). We felt that if we were at point A, then that
would mean that we have topped at 10500, and to expect a pullback
before further rally to hit 11000 at point B. When news of Dubai
default came up, we thought "Perfect timing!" – and that it was going to be used as the "excuse" for
the expected pullback. That was not to be as markets resumed the rally
after the weekend to make higher highs.
We then searched the web to see if anyone else saw this. We found
one – Louise Yamada. She tries to explain the similarities of 1937 and 2007 both
from a fundamental and technical perspective. Here is what she says about 1937 vs 2007
(2/5 videos)
Where to From Here ?
Good luck to all.
———————
Fibonacci Numbers, Fibonacci's Golden Ratio
0
1
1
2
3
5
8
13
21
34
55
89
etc
The division of any two adjacent numbers gives the amazing Golden number e.g. 34 / 55 = 0.618
It is called the Fibonacci series after Leonardo of Pisa or (Filius
Bonacci), alias Leonardo Fibonacci, born in 1175, whose great book The
Liber Abaci (1202) , on arithmetic, was a standard work for 200 years
and is still considered the best book written on arithmetic. It was the
principal means of demonstrating and introducing the enormous
advantages of the Hindu Arabic system of numeration over the Roman
System. Leonardo's reputation amongst scholars was deservedly great. It
was so outstanding that King Frederick II, visiting Pisa in 1225, held
a public competition in mathematics to test Leonardo's skill and he was
the only one able to answer the questions (Huntley 158). Fibonacci
ratios occur naturally around us: width vs height of picture frames, no
of petals in a flower, etc (see the mystery of Fibonacci Ratio and Numbers)
"This is Co-Pilot nummy-nums here and I'd like to welcome you to Flight 1120 with Gold Man-Sacks Airlines where we not only get you there, but we teach you how to pray. Please put your seat backs and tray tables in the full upright and locked position. On our multi-day journey we will be cruising at an altitude of about 10,450 Dow points (or 1120ish S&P points) and if the turbulence kicks in, our cruising altitude may be up around 10,680. In a little while, please don't forget to see the magnificent view on the left side of the plane of the Grand Canyon. We will be offering the red pill or the blue pill again before landing.We will be arriving in Honolulu at dawn.Oh … and they don't know we're coming."
Short-term count of this last wave we've been experiencing. We could keep subdividing and I'd have to reconsider the whole short-term count if we keep blasting higher. But keep in mind, EW counts are usually wrong in the short-term and more accurate in the long-term.
