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Stocks & Commodities V. 2:2 (66-73): FIBONACCI FORECAST EXAMPLES by Tucker J. Emmett FIBONACCI FORECAST EXAMPLES by Tucker J. Emmett I have a system that I use, with great success, for making short and long term predictions for various segments of the futures market. Recently, I have been asked repeatedly for more descriptive information concerning my system and techniques, and this article is my reply. In it, I will first briefly describe the theory, and then devote most of the article to examples of the proper application of my own Fibonacci techniques. These techniques I have researched over the past ten years and have tested empirically in the futures markets. I will highlight what to look for. For a more thorough discussion of the theory and principles behind the application of the Fibonacci series to the futures and stock markets, you may want to refer to my Fibonacci Forecast or some other Fibonacci reference. The Fibonacci Series is a succession of integers as follows: 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, . . . etc., each successive number in the series being the sum of the two previous. The ratio between successive numbers in the series approaches .618, or inversely, 1.618. These ratios are extremely important. My Fibonacci approach to the futures markets involves subdividing each market into three specific categories: Pattern, Ratio, and Time. (1) Pattern -- This refers to the wave pattern that every market is continually in the process of creating the number of waves up, versus the number of waves down. Each bull move, to complete itself, must have three major waves upward, interspersed by two major corrections, for a total of five major legs. Since each of these major waves can be also subdivided, I continually analyze the wave picture being provided by a given market to ascertain when a full wave pattern has been completed. This is a major clue in determining when a market has definitely topped out or bottomed out. A bear market is not quite a mirror image of a bull market, but the wave pattern count remains the same, although the patterns themselves vary a bit. It is the count that is of prime importance. (2) Ratio -- This refers to the ratio between the successive bull waves and their corrections, and the bear waves and their corrections. The various waves should relate to each other based upon the Fibonacci ratios mentioned (not forgetting that the first part of the series provides '1' as a ratio, also). When you Article Text Copyright (c) Technical Analysis Inc. 1 Stocks & Commodities V. 2:2 (66-73): FIBONACCI FORECAST EXAMPLES by Tucker J. Emmett have wave pattern that correlates to the proper ratios, you then have a second major clue that you have found a major (or intermediate) top or bottom to a market. (3) Time -- The third category, and perhaps the most decisive of the three, is the time frame during which a market carries out its bull or bear price action. Many years ago, I adopted the term 'cycle' to describe the time frame between price swings, this term is generally used by the trade today. 'Cycle' was used because the markets appear to complete a full bull move, or a full bear move, within a specific time cycle. And this time cycle is delineated by the Fibonacci series itself. Since, for my clients, I am concerned largely about the longer term cycles, I generally ignore the shorter term (3 day, 5 day, 8 day, 13 day) cycles, and concentrate on the 3 week (21 day), 5 week (34 day), 8 week (55 day), 13 week (89 day), 21 week (144 day) and so on. The longer term cycles tend to mark the major turning points of markets, and naturally the major turning points are what all traders are gunning for. So in summation (again, I am oversimplifying somewhat to assist those new to the markets in understanding a new idea),when you have a wave pattern that appears to have fulfilled its minor and major wave counts; when the price objectives have been satisfied as predicted by the ratio measurements between successive waves; and when your time cycle appears to have been fulfilled, and therefore a new change in cycle trend can be expected -- then you have satisfied all three of my Fibonacci categories. The reliability factor of any trade entered at this juncture is extremely good, and the 'Profit to Risk' factor will be enormously in your favor. Now for the examples -- I am simply going to go over several major markets and show you how I have traded them with this Fibonacci approach. LIVE HOGS: This is one of my favorite markets, both for larger managed accounts, as well as for smaller ones. Referring to Chart 1, note that the 40.50 level in October of 1983 gave us the perfect point to reverse shorts and go long, because all three categories had been satisfied, and they had been satisfied extremely accurately. First, the pattern was easily seen and easily delineated -- price completed two major waves down (A-A' and B-B') and was therefore in its third and final major wave down (C-C'). We knew that when this wave was halted, our big bear market would be at an end. Article Text Copyright (c) Technical Analysis Inc. 2 Stocks & Commodities V. 2:2 (66-73): FIBONACCI FORECAST EXAMPLES by Tucker J. Emmett Where was it likely to halt? Since 1.618 of leg A-A' gave us precisely our objective for the length of leg B-B', then 1.618 of leg B-B' should give us our objective for the length of leg C-C'. This works out to 40.50. We now had two of our categories apparently satisfied -- We established that price was in a third major wave down, and that the proper maximum objective for this third wave was 40.50. Our third category, the time cycle, then fell nicely into place. Price had completed a full 89 weeks from the previous major low in December of 1981, and a 55-week completion from the top of the market. Hence with the Fibonacci pattern at an apparent completion the Fibonacci ratios reached by the price objectives being met, and the Fibonacci time cycle completed, my analysis indicated that all market forces would combine to drive the hog market abruptly and dramatically higher; and this is what happened. Now for a bit of ongoing prediction: Once this first wave-up we are now in has been completed, the ratio retracement should bring price back to about the $.46 level, which would be my next buy-in point for a second wave upwards. The reason is this: From the lows in the hogs at $ .29 during 1980, there have been two major waves upwards in the grand cycle (labeled I and II).. This implies that we must have a third major wave upwards to take out the $ .68 highs from a year ago, before the entire bull cycle will have been completed. Now that you know we are likely to be in a bull market for hogs for the next year or so, it makes buying the dips a little easier; there should be plenty of room left on the upside, to say the least. LIVE CATTLE: The cattle market fell right into place very nicely although the bottom at A was several weeks premature, Article Text Copyright (c) Technical Analysis Inc. 3 Stocks & Commodities V. 2:2 (66-73): FIBONACCI FORECAST EXAMPLES by Tucker J. Emmett based on the long term 233-week cycle I was waiting for. (This cycle represented the end of the entire sideways market we have had since the highs were made in cattle more than four years ago.) On Chart 2, you can see the three waves downwards very nicely marked out, going into the 233-week cycle. Then the first major wave up (I) with its correction (just about 61.8%), followed by our second wave up (II) with its ratio projection to the 70.50 level. After the correction to this wave, we will be ready to buy into the market again for the third wave up. This should take us up through old highs to the $ .80 level. The absolute top will be at hand when the pattern has been completed, price ratios from wave II have been satisfied, and the 'up' time cycle has been completed. GOLD AND SILVER: The precious metal markets have, as should be no surprise, extremely similar cycle frameworks. Gold and silver both topped out on the 34-week cycle from the bottom. And at that point, the silver market had perfectly satisfied each of my three Fibonacci categories. The pattern delineation was perfect. It had completed minor wave 1, minor wave 2, and was in a third subwave (z) of minor wave 3, subwaves x and y having been completed. The 1.618 ratio objectives of wave 2 gave an upside target of 14.00, and the 1.618 ratios objectives of subwave Y gave a target of 15.00, confirming my original target. Hence, we had pattern completion, ratio completion, and cycle completion, and the market collapsed five dollars lower within the next two weeks, a dramatic example of my Fibonacci techniques at their best. To continue the analysis for silver, the current down cycle should be coming very near its end. We have had two major down moves (I and II) and are now in III, the final leg down. The strong up cycle should begin once we have passed the 55-week pivot point (89 weeks from previous low). Our price objectives at $8.00 represent the 61.896 correction of the first major leg up from $5 to $15; since that represented only the first major wave up, which will take out the $15 and keep going up to the next ratio objective. We thus have the ratio, are very near cycle completion, and very close to a pattern completion -- all Article Text Copyright (c) Technical Analysis Inc. 4 Stocks & Commodities V. 2:2 (66-73): FIBONACCI FORECAST EXAMPLES by Tucker J. Emmett systems should be ready for purchases in a short period of time. Likewise on the gold futures -- we are nearing pattern completion, cycle completion, and the 61.8 ratio has already hit. When the cycle has passed, I hope to be fully committed to the long side for the next major move up, which will take out the $500 level and keep going. SUGAR: The sugar market last year was predicted extremely well by these Fibonacci cycles. It has several unusual features worth noting, however. The 233 long term cycle actually bottomed the market out after the first leg up (I) had been accomplished. So I had to watch leg (I) move up and come back again before I felt I could safely buy the market. The price exploded out of my 233-week cycle lows very nicely reaping some huge profits on its way up to leg II (which surpassed my 1.618 ratio objectives by 150 points). The next major buy point should be the 55-week cycle lows to be made the first week of February. If the pattern and ratios look proper at that point, we should then be ready for the beginning of wave III with maximum objectives up near the $ .20 level. Always, of course, be alert when a major cycle low is violated to the downside -- unless your ratio or pattern provides the explanation for such an occurrence, you are better off on the sidelines. Article Text Copyright (c) Technical Analysis Inc. 5 Stocks & Commodities V. 2:2 (66-73): FIBONACCI FORECAST EXAMPLES by Tucker J. Emmett SWISS FRANC: A question that frequently arises is, how safe is it to make a trade when you have only one, or two out of my three categories satisfied? The answer is, you have decreased your degree of certainty by precisely the category that has not been satisfied. An extremely good example is the Swiss Franc. At this time, we have the apparency of a perfect long term and a near term pattern completion, as well as a good ratio completion. The 1981 lows were major wave I, the 1982 lows were major wave II, and we have just taken out the major wave II lows when the Article Text Copyright (c) Technical Analysis Inc. 6 Stocks & Commodities V. 2:2 (66-73): FIBONACCI FORECAST EXAMPLES by Tucker J. Emmett March Swiss Franc went to 44.70. Thus we finally have ourselves a major III. Moreover, we have three minor waves downwards (waves 1 through 5 being the correct subdivisions of Major III), so there is a strong probability that Major III has run its course. In addition, we have satisfied one of the minor ratio objectives (1.618 of leg 1 giving us the aformentioned 44.70 objectives). So at least two of the necessary categories seem to have been satisfied. But there is no clearly discernible time cycle that is bottoming out. Thus we are missing one of the major prerequisites for a high profit - low risk trade. With such a fine-looking pattern and ratio presented to me, I would be buying the market for a move up, but I would be using very close stops under recent lows, in case wave III should give us an 'extension' into lower territory. WHEAT: Another example of a market with a perfect pattern and ratio delineation, whose cycle framework is a bit 'out of sync.' You can see the three major waves up, and we are now working on the three major waves down, wave 1 has been completed as has wave 2, and we are now in third and final wave 3. Ratio objectives for wave 3 (from 1.618 of wave 1) are at $3.15. But the next time cycle does not hit until early March, 55 weeks out from 'K', which was the turnaround pivot point of a longer term cycle. If we hit $3.15 before early March, and the subwaves of wave 3 downward are all in place, then shorts can be covered and longs initiated, although conservative traders would be wise to await the completion of the 55-week cycle to achieve a greater degree of certainty. Article Text Copyright (c) Technical Analysis Inc. 7 Stocks & Commodities V. 2:2 (66-73): FIBONACCI FORECAST EXAMPLES by Tucker J. Emmett SOYBEANS: The recent downtrend in soybeans has been a thing of beauty. The pattern has been easy to follow. We are currently in wave 3 of wave II (i.e., we are about to complete the final minor wave downwards of the second major leg downwards), at which point we should see a nice sharp rally upwards to the 61.8% retracement level, and then final Wave III to the downside going into the next major 55-week cycle during March. The Downtrend in beans has been particularly rewarding to trade, since there were three separate and distinct 61.8 retracements (as outlined) which gave everyone an opportunity to sell short on good rallies, if they missed selling the top. The downside objectives are as follows: 'A' represents the 61.8% correction of the move up from July of 1983, and 'B ' represents the 61.8% correction of the entire move from the lows of October of 1982. Therefore on a near term basis, we should see a rally upwards in the beans once the $7.20 level is hit, but Article Text Copyright (c) Technical Analysis Inc. 8 Stocks & Commodities V. 2:2 (66-73): FIBONACCI FORECAST EXAMPLES by Tucker J. Emmett we must wait to see the completion of the 55-week cycle before we can be confident that we are embarked upon a new move to the upside that will take out the $9.50 level. Summary: To sum it all up, my Fibonacci approach is based upon an accurate analysis of the Pattern, Time, and Ratio of each market involved. In my eleven years of trading, both for myself and my customers, I have found no more accurate or helpful system than this application of the Fibonacci series to the futures markets. Tucker Emmett is a cum laude graduate from Harvard University where he studied mathematics and economics. In 1970 he was awarded the Juris Doctor degree from the University of Virginia Law School. He is a registered representative in securities and commodities and is a member of the Chicago Mercantile Exchange. He writes a bi-weekly review published by Anspacher on grains, meats, metals, and currencies. Article Text Copyright (c) Technical Analysis Inc. 9