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Stocks & Commodities V. 3:2 (77-78): Fibonacci Based Forecasts by Tucker J. Emmett Fibonacci Based Forecasts by Tucker J. Emmett In previous Technical Analysis of Stocks & Commodities magazine articles about Fibonacci Forecasting I have dealt at length with the proper application of the Fibonacci mathematical series to the futures markets. This simple series (1, 2, 3, 5, 8, 13, 21, 35, 55, 89, 144,...etc.) can quite accurately and adequately be used to forecast trends in the futures markets with amazing consistency. With this article, I shall deal specifically with only one futures market—the Treasury Bonds—in order to delve precisely in detail into a given market than previous articles have permitted, and in order to elaborate thoroughly upon ideas only briefly hit upon in prior articles. Let me say that first and foremost I am a broker. I handle individual and managed accounts in the futures markets, and have been doing so for twelve years as a partner of Anspacher an Associates . It is therefore extremely necessary that any technical analysis that I use bring fruit in practical results, and that I have a precise way to estimate the risk and proper entry points for any given position that I put on in the futures markets. The proper use of the Fibonacci approach to the markets that I have developed over the past ten years affords me this. Although many traders do not realize it, R. N. Elliott was probably the first to use the Fibonacci series and its inter-relationships to trade with, his application being predominantly to the stock market. My own application of this series has been exclusively to the futures markets, because of the higher yield obtainable when one is correct in these markets due to their increased volatility. In doing so, I have continually attempted to aim towards simplification, so that I can update and do rapid work on each of the 25 or so futures markets that my customers like to trade, without sacrificing accuracy. Fibonacci Basics The approach I use is this. (1) Each market should be subdivided into three categories: pattern, time, and ratio. (2) Each of these categories should be a proper expression of the underlying Fibonacci series; in other words, a Fibonacci fit should be arrived at, before a position is entered, to ensure the greatest probability of success. (3) The proper expressions are these: Pattern— every bull market, and every bear market, subdivides into three waves up and three waves down. Time— the duration of waves up and waves down should relate closely, if not exactly, to a Fibonacci time cycle (which can be expressed in weeks (e.g. 13 weeks) or days (89 days). Ratio—the length in terms of price that a wave up or down travels, or that a correction to such a wave travels, should correlate closely, if not exactly, to a Fibonacci ratio of the previous wave in the sequence. The Fibonacci ratios are the ratios between successive numbers in the Fibonacci series (1, 1/2, .618) as well as 1 plus .618 (1.618) and 1 minus .618 (.382). The .618 and .382 apply primarily to corrective waves in a move; the 1 and 1.618 apply to successive waves m a move. A few more simplifications: (1) Many Elliotticians that have come on the scene in the past six years will disagree with my statement that a bull move has three waves up, and a bear move has three waves down since Elliott clearly states that while a bull move has three waves up, a bear move has only two waves down. My twelve years of trading experience and observation shows me that bull moves and bear moves tend to mirror each other, and three waves are the norm. (2) The first wave of a move (up, or down) plus the correction to this wave should fall upon a Fibonacci weekly cycle. The second wave of a move (up or Article Text Copyright (c) Technical Analysis Inc. 1 Stocks & Commodities V. 3:2 (77-78): Fibonacci Based Forecasts by Tucker J. Emmett down) should end on a Fibonacci cycle. The correction to this second wave should also fall upon a Fibonacci time cycle. These simple rules are frequently necessary to delineate which wave of a given pattern we are looking at, since the patterns themselves are much easier to discern in hindsight than foresight. (3) When one is dealing with a market that is dramatically oversold (or dramatically overbought) the corrections to the first wave, and frequently to the second wave, should be expected to be about 38.2%. The correction to a normal bull wave up out of a non oversold area should be 61.8%. The 61.8% correction is by far the more general occurrence. (This simple observation itself can make a trader dramatically improve his performance.) Treasury Bonds Taking these rules, let me show you how they have gave quite accurate evidence as to when and why the bull move in bonds topped out at 80.00 in 1983; why the bear move in bonds bottomed out at 59.16 in 1984; and what they tell us the bonds should be doing over the next six months. The T-Bonds began their big bull move up to 80.00 from the 55.00 level which hit in October of 1981, on the 89 week cycle low from the previous highs. Major Wave I and Major Wave II implied the necessity of a Third Major Wave (three waves up in a bull market) with a probable target at t, the 1.618 projection of Wave II. As we began Major III upwards, intermediate wave (1) occurred with its correction, and then intermediate wave (2) started. When minor wave 1 gave us a 1.618 projection to provide us with the top of minor wave 2, minor wave 2 then gave us the 1.618 projection to exactly 80.00, the target t’, which permitted us to raise our sights above the previous target at t derived from Major Wave II. Minor 3, and intermediate (2) narrowly missed this projection, but we were still missing an intermediate wave up to complete Major III, which was provided by intermediate (3). Article Text Copyright (c) Technical Analysis Inc. 2 Stocks & Commodities V. 3:2 (77-78): Fibonacci Based Forecasts by Tucker J. Emmett At this point, we had completed our third intermediate wave (3) [note that wave (3) was about equal to intermediate (1)] as well as our third Major Wave III, in addition to having hit upside targets, so that when the market started to move lower from III we had pattern requirements and ratio requirements satisfied. Since the key 55 week cycle had occurred just before (2), pattern - time - ratio all appeared to have met their Fibonacci fit, and the market was ripe for short sales and a move lower. The move down from 80.00 was even simpler and more clear-cut to analyze than the move up. Our first Major 1 gave us the 1.618 objective for Major 2. Major 2 gave us a correction equal to 61.8% of itself, and Major 3 began, traveling all the way down to 59.16, which was the exact 1.618 maximum projection of Major 2, Major 3 downwards. However, a close reading of Major 3 showed we were still missing a minor wave (3), which the market provided us, making a slightly lower low precisely on the 144 week cycle lows from the previous low near 55.00, where the big move up to 80.00 had started. So once again we had all three of my requirements met for a major market turnaround. Both minor and major waves appeared to have been completed, the price ratio had been met quite accurately, and the 144 week major cycle had hit on the dot. My pattern - time - ratio had all been met, and the market began its next big move up right on time. The move up to 74.07 is subdivided as shown, with Major I about equal to Major II, and 1.618 of Major Article Text Copyright (c) Technical Analysis Inc. 3 Stocks & Commodities V. 3:2 (77-78): Fibonacci Based Forecasts by Tucker J. Emmett II giving us the maximum upside target of 73.16. This target was hit on the 21 week cycle and all conditions appeared to have been met for exiting longs and entering shorts at a. The market then gave us two minor thrusts upwards (b and c), so that wave (3) can be seen to be subdivided into three minor waves. This proved perplexing for several weeks, but since my maximum targets had been met on the upside, this complex completion of wave (3) did not alter my bearish impression of the market once the 73.16 target and the 21 week cycle had been hit. Once again we now have all three prerequisites met for the beginning of a move downwards. A represents the 38.2% correction of the entire move up from 59.16, B is the 61.8 correction, and the next cycle is at 34 weeks as indicated. Article Text Copyright (c) Technical Analysis Inc. 4