It is Fibonacci Time Again in the Dow Industrials

By: Robert McHugh | Mon, Dec 19, 2005

For those unfamiliar with our Fibonacci phi mate turn date analysis work, since the Dow Industrials hit their all-time top on January 14th, 2000, every single significant top or bottom has occurred a Fibonacci phi golden ratio with the number of trading days from that date and another top or bottom, using closing prices. These pairs of dates are referred to as phi mates. Because this has occurred in the past, we use this analysis to project likely turn date periods in the future. The September 12th top came on the 1,423rd trading day from the 1/14/2000 top, and came 878 trading days from the March 19th, 2002 top, which was 545 trading days from 1/14/00. Thus the time ratio worked out to 545/1423 = .3829 and 878/1423 = .6171. The golden ratio is of course .382 to .618.

September 12th, 2005 also came close to a golden ratio with its second phi mate, the August 5th, 2003 minor bottom. That date was 883 trading days from 1/14/00, and 540 trading days from September 12th, 2005. 540/1423 = .3794, and 883/1423 = .620, just a few days off of a perfect .382/.618 ratio. September 12th came exactly a Fibonacci 144 trading days from February 15th, 2005's top, and was two days from being a Fibonacci 89 trading days from the May 9th, 2005 minor top, and was 3 days from a Fibonacci 34 trading days from July 28th's bottom.

Because we are moving farther away from the Dow Industrial's all time top on January 14th, 2000, the phi percentages are working out for more than one date, thus we now are identifying phi mate turn windows of days.

The next phi mate turn date window is scheduled to arrive from December 21st through December 29th +/- a day or two. December 27th is the best mathematical fit so we will use that date to demonstrate the math. Like March 4th, and September 12th, it also has two phi mates (most have had just one). We've noted that in the past, turns with two mates tend to be more significant.

For example, the March 4th, 2005 top represents the closing high for the year in the Dow Industrials, 10,940.55, and remains the closing high for the rally in the Dow Industrials since October 2002's low. The September 12th high saw five confirmed Hindenburg Omen crash signals generated just after it, and it took PPT involvement to slow a fast deteriorating equity market.

Here's the math for December 27, 2005: It is 1,497 trading days from 1/14/00's all-time top in the Dow Industrials (boy, that date is turning out to be one for the history books). It is also 572 trading days from 9/19/03's minor top - which was 925 trading days from 1/14/00. 572/1497 = .382, and 925/1497 = .618. December 27th's second phi mate is the April 29th, 2002 low. That date came 573 trading days from 1/14/00, and is 924 trading days from December 27, 2005. 573/1497 = .3827, and 924/1497 = .6172.

We cannot be sure whether this will be the major top we are looking for to conclude the Rising Bearish Wedge pattern and end the secondary Bull market from October 2002, or whether it will be a minor bottom that will lead to one more final top later, sometime between January and March 2006. But in either case, it should be a trend bifurcation point.

In addition to this phi mate turn date window, we also have a Fibonacci trading days cluster from previous closing highs and lows that fit inside this same December 21st to 29th window +/- a few days. Fibonacci clusters usually signal trend turns. They are as follows:

1) December 28th, 2005 is a Fibonacci 987 trading days from the January 29th, 2002 closing low.

2) December 20th, 2005 is a Fibonacci 610 trading days from the August 5th, 2003 closing low.

3) December 19th, 2005 is a Fibonacci 377 trading days from the June 23rd, 2004 closing top.

4) December 23rd, 2005 is a Fibonacci 233 trading days from the January 24th, 2005 closing low.

5) December 27th, 2005 is a Fibonacci 144 trading days from the June 2nd, 2005 closing top.

6) January 4th, 2006 is a Fibonacci 89 trading days from the August 26th, 2005 closing bottom.

So you can see, there is a lot of Fibonacci action around the last week of December, first week of January. It could be shaping up to be the major top we are looking for - or the next low which will lead to a final rally into a major top later in the first quarter 2006. Price action over the next week should tell us which it will be. Note: For those of you unfamiliar with Fibonacci numbers, they are 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 610, 987, etc... The next number in sequence is equal to the sum of the immediate prior two, and the ratio of each of the prior addends to the sum is either .382 or .618. These numbers and ratios are significant for their prevalence throughout nature.

Don't miss Dr. McHugh's interview with CBS radio at WWJ 950 AM on December 30th, 2005. You can access this station through the internet by clicking on www.wwj.com . Jayne Bowers presents Dr. McHugh's views on the Fed's decision to drop M-3, the Plunge Protection Team, and new Fed Chairman Ben Bernanke.

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Author: Robert McHugh

Robert McHugh Ph.D. is President and CEO of Main Line Investors, Inc., a registered investment advisor in the Commonwealth of Pennsylvania, and can be reached at www.technicalindicatorindex.com. The statements, opinions and analyses presented in this newsletter are provided as a general information and education service only. Opinions, estimates and probabilities expressed herein constitute the judgment of the author as of the date indicated and are subject to change without notice. Nothing contained in this newsletter is intended to be, nor shall it be construed as, investment advice, nor is it to be relied upon in making any investment or other decision. Prior to making any investment decision, you are advised to consult with your broker, investment advisor or other appropriate tax or financial professional to determine the suitability of any investment. Neither Main Line Investors, Inc. nor Robert D. McHugh, Jr., Ph.D. Editor shall be responsible or have any liability for investment decisions based upon, or the results obtained from, the information provided.