Projecting With Fibonacci

By: Stock Barometer | Sun, Sep 9, 2007
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Bi-Weekly Stock Barometer No. 165
9/9/2007 7:54:15 PM

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As part of our educational series that we're doing with our Trade Tutor free newsletter, let's take a look at using Fibonacci to project profit targets.

Without spending a lot of time going into what Fibonacci is, let me just say that this is probably the best tool that traders have in projecting price targets - so it's worth paying attention to.

Projecting price targets is one of the components in establishing a successful trading plan. The more realistic your target, the more likely it will be hit. Never enter into a trade without a plan that includes when and where to enter, where to place your stop and where you plan on exiting with a profit.

There are also several ways to utilize Fibonacci in projecting targets. The approach we'll use here will be based on the Fibonacci ABC Trade.

Let's take a look at RIMM (A very popular and over followed stock - these are the ones you want to own actually - but not RIMM anymore as we'll discuss here).

For reasons that are obvious here, RIMM has been one of the most talked about stocks for some time. Sure - any stock that goes from 20 to 80 for more than a 400% gain over the last year roughly is about as good as it gets. Here's how Fibonacci could be used to trade RIMM both a while ago and going forward.

The Fibonacci ABC trade says that a stock moving from point A to point B and retracing to point C should complete an equal move from C to D that is equal to the move from point A to point B as long as the retracement from B to C does not exceed 38.2% of the move from point A to B.

Got it? I know it's a mouthful but it's one you want to memorize. There are several variations depending on the depth of the retracement, but let's just focus on the main one I stated above.

For a matter of explanation, points A and C are swing lows. Point B is a swing high.

The set up of this trade assumes you already know points A, B and C. And part of being successful is properly identifying these swing points. This isn't that difficult, so we won't spend any time on it.

After identifying A, B And C - the next step is to calculate point D - that's the projection point where the stock is most likely to go to. The initial point would be the 100% projection level - or 68.5. (or if you were to use a formula, it would be D = B - A + C.

So if we were trading RIMM sometime after the first swing high of 11/06. Then we'd be looking for a low to be established. The 38% retracement is 37.3. So if I were watching this for entry, I'd be patient and wait for the consolidation to play out and play this as a break out trade. Sure you give up some of the gains waiting for the break out, but you also don't tie up your money holding through a consolidation.

Another way to play it would be to calculate the 3:1 Profit to loss ratio based on the projection and the current pricing. If entering the trade at that point allows your 3:1 ratio stop placement to be below resistance, then entry at the current level would be acceptable, however, it could still result in holding through a consolidation.

Tying up your money is opportunity lost.

So there you have it. RIMM would have hit the 100% objective and you would have entered at the break out and made roughly 30-40%.

The next thing to consider on these projections is that if the stock makes a sharp run, the likelihood increases that the stock may make a move to the 162% projection level. That's roughly where RIMM made it last week.

So what does this mean for RIMM?

Unfortunately, the implications of a move to the 162% projection level are that the move in the stock is likely to consolidate for a considerable period. So if you're looking for a high flyer to trade - you might want to avoid RIMM. If you're thinking RIMM is a good short candidate, there's a gap open at the 55 level that could be filled on weakness. Ok, lots of weakness.

On to the charts.

Message From The Markets

Market action is ruled by sentiment and by monitoring market internals and studying sentiment you can reasonably predict future market movements. The basis of the Stock Barometer system is overlaying extremes in sentiment with sound technical analysis to predict the likelihood of future price movement. Each indicator and chart measures the hope, fear and greed of investors and traders from different angles. Follow along with my charts and over time, you'll also learn to understand how to read the markets, which is essential prior to setting up each and every trade.

STOCK BAROMETER CHART

The Daily Stock Barometer is a proprietary measure of market energy. The direction of the stock barometer determines our short-term outlook on the market's direction. A BUY or SELL signal is triggered when the indicator clearly changes direction. If the line is moving up, we are in BUY MODE and if it's moving down, we are in SELL MODE. The black line is a 5-day moving average that we use to confirm changes in direction.

EQUITY PUT CALL RATIO CHART

The CBOE put/call ratio is comprised of two sets of data; equity options and index options. The index component contains items that are used as a hedge, thereby distorting the correlation and interpretation of the indicator. I use the equity put/call ratio. This is one of the most accurate read of investor's fear and complacency.

TRIN/ARMS CHART

Richard Arms developed the arms index. It is also referred to the Trading Index or TRIN for short. It is a measure of the ratio of up stocks and down stocks divided by the ratio of up volume and down volume. Our Spread Chart converts the arms index data into momentum Buy and Sell Signals.

TICK CHART

The tick index is represents the sum of all stocks ticking higher minus all stocks ticking lower (a stock is said to be trading on an up tick when it trades at a higher price than the last sale). It's utilized as a day trading tool as it gives you an up to the second read of the intensity of buying and selling.

BREADTH (ADVANCE - DECLINE) CHART

Each day several thousand stocks either advance, decline or remain unchanged. The number of advances and declines normally ranges from +2500 to -2500. A high number of advancing stocks normally marks a top just as a high number of declining stocks normally marks a bottom. Monitoring the 5 and 13-day moving averages of this allows us to better predict future prices.

VXO CHART

The VIX is a measure of volatility on options pricing. We use the old VIX, which is now called the VXO. The higher the volatility, the more likely the market is close to a bottom, as traders are willing to pay more premium for puts, which act as Insurance on their long positions.

Cycle Time

Monday will be day 6 in our UP cycle.

The Stock Barometer signals tend to follow a 5, 8 and 13 and sometimes 21 day Fibonacci cycle that balance with 'normal' market cycles. Knowing where you are in the current market cycle is important in deciding how long you expect to maintain a position.

Potential Cycle Reversal Dates

2007 Potential Reversal Dates: 1/10, 1/14, 1/27, 1/31, 2/3, 2/17, 3/10, 3/24, 4/21, 5/6, 6/15, 8/29, 10/19. We publish these dates up to 2 months in advance.

Our next date is 10/19, which is a ways off, so likely we'll have some sub cycle reversal dates in the interim.

My timing work is based on numerous cycles and has resulted in the above potential reversal dates. They're predictive and have nothing to do with the barometer cycle times. However, due to their accuracy in the past, I post the dates here.

2006 potential reversal dates: 1/16, 1/30, 2/25, 3/19, 4/8, 5/8, 5/19, 6/6(20), 7/24, 8/20, 8/29, 9/15, 10/11, 11/28.2005 Potential reversal dates based on 'other' cycle work were 12/27/04, 1/25/05, 2/16, 3/4, 3/14, 3/29, 4/5, 4/19, 5/2, 6/3, 6/10, 7/13, 7/28, 8/12, 8/30-31, 9/22, 10/4, 11/15, 11/20, 12/16.

Stock Barometer Buy And Sell Signals

QQQQ or SPY Chart: A chart is provided in every bi-weekly report and shows the barometer Buy and Sell Signals (which are provided in my morning updates) as well as showing the next highlighted 'reversal' window. The numbers adjacent to the buy and sell signals are the number of days between signal (cycle time).

Here's one years of our end-of-day buy and sell signals for the Stock Barometer over the past year. They're marked on the QQQQ chart with red and blue lines (or red and blue arrows). Note we recently changed bottom and top to read buy and sell.

 

9/17

Projected SELL Signal (7 days from last signal)

 

9/06

SELL (3 days)

 

8/31

BUY (3 days)

 

8/29

SELL (7 days)

 

8/17

BUY (3 days)

 

8/14

SELL (4 days)

 

8/8

BUY (16 days)

 

7/17

SELL (3 days)

 

7/12

BUY (15 days)

 

6/20

SELL (4 days)

 

6/14

BUY (20 days)

 

5/15

SELL (27 days)

 

4/5

BUY (7 days)

 

3/27

SELL (13 Days)

 

3/8

BUY (34 days)

 

1/18

SELL (4 Days)

 

1/11

BUY (17 Days)

 

12/22

SELL (6 Days)

 

12/14

BUY (0 days)

 

11/24

SELL (0 days)

 

11/14

EXIT/CLOSE/CASH (9 days)

 

11/01

SELL (18 days)

 

10/26

BUY (18 days)

 

10/2

SELL (4 days)

 

9/26

BUY (14 days)

  (historical reversal dates and performance figures are published at the bottom of the home page and updated annually)

The following work is based on my spread/momentum indicators for the QQQQ, GLD, USD, USO and TLT. They are tuned to deliver signals in line with the Stock Barometer and we use them only in determining our overall outlook for the market and for pinpointing market reversals. The level, direction, and position to the zero line are keys in these indicators. For example, direction determines mode and a buy signal 'above zero' is more bullish than a buy signal 'below zero'.

Gold Spread Indicator (AMEX:GLD)

To trade Gold, utilize the Gold ETF AMEX:GLD. This gives us a general gage to the overall health of the US Economy and the markets, as well as to assists us in the entry of positions in our stock trading service.

US Dollar Index Spread Indicator (INDEX:DXY)

To trade the US Dollar, I'd utilize the Power Shares AMEX:UUP: US Dollar Index Bullish Fund and AMEX:UDN: US Dollar Index Bearish Fund.

Bonds Spread Indicator (AMEX:TLT)

To trade Bonds, I recommend Lehman's 20 year ETF AMEX:TLT. Note that the direction of bonds can have an impact on the stock market. Normally, as bonds go down, stocks will go up and as bonds go up, stocks will go down.

OIL Spread Indicator (AMEX:USO) *NEW*

To trade OIL, utilize AMEX:USO, the OIL ETF. We look at the price of oil as its level and direction can have an impact on the stock market.

Summary & Outlook

We moved into Sell Mode on Thursday night, unfortunately the market was down large on Friday. I expect the gap from Friday to get filled and set up the next wave lower.

To follow our daily signals and trades and learn more about our system, click here and sign up for a free trial. Sign up for our free weekly TRADE TUTOR newsletter to get up to date advice from our Pro Traders.

I hope you had a great weekend.

As always, if you have any questions or comments, feel free to email me here at jay@stockbarometer.com.

Regards,

 


 

Stock Barometer

Author: Stock Barometer

www.stockbarometer.com

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Performance results are hypothetical. Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not actually been executed, the results may have under- or over-compensated for the impact, if any, of certain market factors, such as a lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown.

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