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Fibonacci studies: arcs, fans, retracements, and time

Overview: Leonardo Fibonacci was a mathematician who was born in Italy around the year 1170. It is believed that Mr. Fibonacci discovered..

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Saturday, November 12, 2011

Fibonacci studies: arcs, fans, retracements, and time zones.

Overview:

Leonardo Fibonacci was a mathematician who was born in Italy around the year 1170. It is believed that Mr. Fibonacci discovered the relationship of what are now referred to as Fibonacci numbers while studying the Great Pyramid of Gizeh in Egypt.

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, 610, etc.These numbers possess an intriguing number of 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.

Interpretation:

There are four popular Fibonacci studies: arcs, fans, retracements, and time zones. The interpretation of these studies involves anticipating changes in trends as prices near the lines created by the Fibonacci studies.

Arcs:

Fibonacci Arcs are displayed by first drawing a trendline between two extreme points, for example, a trough and opposing peak. Three arcs are then drawn, centered on the second extreme point, so they intersect the trendline at the Fibonacci levels of 38.2%, 50.0%, and 61.8%.The interpretation of Fibonacci Arcs involves anticipating support and resistance as prices approach the arcs. A common technique is to display both Fibonacci Arcs and Fibonacci Fan Lines and to anticipate support/resistance at the points where the Fibonacci studies cross.

Note that the points where the Arcs cross the price data will vary depending on the scaling of the chart, because the Arcs are drawn so they are circular relative to the chart paper or computer screen.The following British Pound chart illustrates how the arcs can provide support and resistance (points “A,” “B,” and “C”).

Fans:

Fibonacci Fan Lines are displayed by drawing a trendline between two extreme points, for example, a trough and opposing peak. Then an “invisible” vertical line is drawn through the second extreme point. Three trendlines are then drawn from the first extreme point so they pass through the invisible vertical line at the Fibonacci levels of 38.2%, 50.0%, and 61.8%.. (This technique is similar to Speed Resistance Lines.)
The following chart of Texaco shows how prices found support at the Fan Lines.

You can see that when prices encountered the top Fan Line (point “A”), they were unable to penetrate the line for several to the bottom Fan Line (points “B” and “C”) before finding (point “C”), they rose freely to the top line (point “D”) where rebounded.

Retracements:

Fibonacci Retracements are displayed by first drawing a trendline between two extreme points, for example, a trough intersecting the trendline at the Fibonacci levels of 0.0%, 23.6%, 38.2%, 50%, 61.8%, 100%, 161.8%, 261.8%, and 423.6%. (Some of the lines will probably not be visable because they will be off the scale.)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.In the following chart of Eastman Kodak, Fibonacci Retracement lines were drawn between a major trough and peak.

You can see that support and resistance occurred near the Fibonacci levels of 23 and 38%.

Time Zones:

Fibonacci Time Zones are a series of vertical lines. They are spaced at the Fibonacci intervals of 1, 2, 3, 5, 8, 13, 21, 34,etc. The interpretation of Fibonacci Time Zones involves looking for significant changes in price near the vertical lines.In the following example, Fibonacci Time Zones were drawn on the Dow Jones Industrials beginning at the market bottom in 1970.



candlestick charting Method

The Japanese developed a method of technical analysis to analyze the price of rice contracts. This technique is called candlestick charting. Steven Nison is credited with popularizing candlestick charting and has become recognized as the leading expert on their interpretation.Candlestick charts display the open, high, low, and closing prices in a format similar to a modern-day bar-chart, but in a manner that extenuates the relationship between the opening and closing prices. Candlestick charts are simply a new way of looking at prices, they don’t involve any calculations.Each candlestick represents one period (e.g., day) of data. Figure 45 displays the elements of a candle.

Interpretation:
I have met investors who are attracted to candlestick charts by their mystique–may be they are the “long forgotten Asian secret” to investment analysis. Other investors are turned-off by this mystique–they are only charts, right? Regardless of your feelings about the heritage of candlestick charting, I strongly encourage you to explore their use. Candlestick charts dramatically illustrate changes in the underlying
supply/demand lines.

Because candlesticks display the relationship between the open, high, low, and closing prices, they cannot be displayed on securities that only have closing prices, nor were they intended to be displayed on securities that lack opening prices. If you want to display a candlestick chart on a security that does not have opening prices, I suggest that you use the previous day’s closing prices in place of opening prices. This technique can create candlestick lines and patterns that are unusual, but valid.The interpretation of candlestick charts is based primarily on patterns. The most popular patterns are explained below.

Bullish Patterns:
This is a bullish line. It occurs when prices open near the low and close significantly higher near the   period’s high.

Hammer:


This is a bullish line if it occurs after a significant downtrend. If the line occurs after a significant up-trend, it is called a Hanging Man. A Hammer is identified by a small real body (i.e., a small range between the open and closing prices) and a long lower shadow (i.e., the low is significantly lower than the open, high, and close). The body can be empty or filled-in.




Piercing line.

This is a bullish pattern and the opposite of a dark cloud cover. The first line is a long black line and the second line is a long white line. The second line opens lower than the first line’s low, but it closes more than halfway above the first line’s real body.

     Piercing LineBullish engulfing lines.

This pattern is strongly bullish if it occurs after a significant downtrend (i.e., it acts as a reversal pattern). It occurs when a small bearish (filled-in) line is engulfed by a large bullish (empty) line.

Morning star.


This is a bullish pattern signifying a potential bottom. The “star” indicates a possible reversal and the bullish (empty) line confirms this. The star can be empty or filled-in.

Bullish doji star.

A “star” indicates a reversal and a doji indicates indecision. Thus, this pattern usually indicates a reversal following an indecisive period. You should wait for a confirmation (e.g., as in the morning star, above) before trading a doji star. The first line can be empty or filled in.


Long black (filled-in) line.



This is a bearish line. It occurs when prices open near the high and close significantly lower near the period’s low.

Hanging Man.
These lines are bearish if they occur after a significant uptrend. If this pattern occurs after a significant downtrend, it is called a Hammer. They are identified by small real bodies (i.e., a small range between the open and closing prices) and a long lower shadow (i.e., the low was significantly lower than the open, high, and close). The bodies can be empty or filled-in.


Dark cloud cover:
This is a bearish pattern. The pattern is more significant if the second line’s body is below the center of the previous line’s body (as illustrated).

Bearish engulfing lines.



    This pattern is strongly bearish if it occurs after a significant up-trend (i.e., it acts as a reversal pattern). It occurs when a small bullish (empty) line is engulfed by a large bearish (filled-in) line.





Evening star.




This is a bearish pattern signifying a potential top. The “star” indicates a possible reversal and the bearish (filled-in) line confirms this. The star can be empty or filled-in.




 Doji star.


 A star indicates a reversal and a doji indicates indecision. Thus, this pattern usually indicates a reversal following an indecisive period. You should wait for a confirmation (e.g., as in the evening star illustration) before trading a doji star.
Shooting star.



This pattern suggests a minor reversal when it appears after a rally.The star’s body must appear near the low price and the line should have a long upper shadow.