Nasdaq & Fibonacci Retracement

10/05/00 10:49:58 AM

by Dennis D. Peterson

Where is the Nasdaq headed? Do Fibonacci retracement lines give us a clue?

Security: $compq
Position: N/A

We hear about one-third and two-third retracements. A two-third retracement is a rough approximation of the ratio of successive numbers in a Fibonacci series --1, 2, 3, 5, 8 . . . Fibonacci numbers are a common occurrence in nature as seen in the number of flower petals and pine cone spirals, to name just two. Does nature play a role in the market? Each number in the series is obtained by adding the previous number, so 2 = 1+1, 3 =1+2, 5 =2+3, 8=3 +5 . . . The ratio of successive numbers is 1/1=1, 1/2=.5, 2/3=.67, 3/5=.6, 5/8=.625, with the ratios converging to .618. Fibonacci retracement is then set at 100%, 50%, 61.8%, 38.2% (38.2=61.8 x .618), and 23.6% (23.6=38.2 x .618). A number of studies have been done to find a correlation between Fibonacci numbers and market prices and success is at best limited.

Nevertheless, since it takes only a few minutes to do the calculation, it's hard to resist not taking a look. If what we see is predictive, Fibonacci retracement says we are in trouble with the Nasdaq. With today's action we have broken the 61.8% retracement support line. That's the bad news. The good news is that we barely broke it.

To place Fibonacci retracement lines, choose a peak and a trough for the 0 and 100% points. I chose November 1999 to anchor the 100% point because it was in November 1999 that we first overshot the constant rate of change of Nasdaq. The peak was easy: the top we hit in March 2000. The 38.2% and 61.8% Fibonacci retracement lines (Figure 1 - bottom chart) hit support/resistance lines that I had drawn independently. Frankly, I was a bit surprised at how well the support/resistance line formed by the gap up in June, and the two tops in July and September matched with the 38.2% and 61.8% Fibonacci retracement lines.

Figure 1: Nasdaq trend using a semilog (top chart) and Nasdaq with Fibonacci trendlines (bottom).

Graphic provided by: MetaStock.

In an earlier article posted just before Labor day, I was wary of a retracement. I had drawn a trendline using the semilog plot of the Nasdaq composite. When I got back I redrew it (Figure 1 - top chart) with the Nasdaq trendline on a semilog plot, starting with '96 and being careful to hit retests in '99. Where the trendline ends up in 2000 is just a continuation of the line from '99. We've broken that one too.

I have been in the market four days since Labor day. Two days when it was up and two when it went down. On one down day I was suspicious and risked little. The next down day there was no bounce where I thought there would be and I got slightly beaten up. So I am still even. But the bull in me wants to be in the market. What's disheartening about this whole affair is the action on Monday (10/2) and Tuesday(10/3) for the Nasdaq. Each morning somebody sees bargains and then as the day develops somebody else (?) sees selling opportunities. I can't find an indicator to cheer me up. I've checked. Believe me I have checked. The number of new lows is lousy and this is a very telling number. Decliners are having a field day. Up volume versus down volume is showing some signs of the Nasdaq being oversold. The American Association of Individual Investors (AAII) ratio shows that investors have been bullish. -- Bullish at record levels for the last quarter, which usually means stocks are too expensive. A bottom should be coming, but I don't see it quite yet. Maybe I'll go back to try and make money on the Standard & Poor's 500 (boring!).

[This article written at market close on 10/3].

Dennis D. Peterson

Market index trading on a daily basis.

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Comments

Date:�/ /Rank:�5Comment:�Would love add l input about retracements -- could it not be said that retracements could be predictive of the percentage of possible bounce upward? If the NASDAQ has retraced 62%, when it bottoms, could it advance by a likely amount? Your five-year trendline would support such a move. shiroguma@aol.com

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Nasdaq & Fibonacci Retracement

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