The first number of the sequence is 0, the second number is 1, and each subsequent number is equal to the sum of the previous two numbers of the sequence itself, yielding the sequence 0, 1, 1, 2, 3, 5, 8, 13, 21 .. etc.
One of the remarkable characteristics of this numerical sequence is that each number is approximately 1.618 times greater than the preceding number. This common relationship between every number in the series is the foundation of the common ratios used in retracement studies.
The key Fibonacci ratio of 61.8% - also referred to as "the golden ratio" or "the golden mean" - is found by dividing one number in the series by the number that follows it. For example: 8/13 = 0.6153, and 55/89 = 0.6179..
The 38.2% ratio is found by dividing one number in the series by the number that is found two places to the right. For example: 55/144 = 0.3819.The 23.6% ratio is found by dividing one number in the series by the number that is three places to the right. For example: 8/34 = 0.2352.
In addition to the ratios described above, many technical analyst and traders also like using the 50% and 78.6% levels. The 50% retracement level is not really a Fibonacci ratio, but it is used because of the overwhelming tendency for an asset to continue in a certain direction once it completes a 50% retracement (Gann Analysis).
This sequence and the retracement are important in finance/investment especially for technical analysts. The most important thing about Fibonacci retracement is that it act as support and resistance. When the price goes up, they act as the resistance and visa versa. Also like ordinary supports and resistances, when a Fibonacci level is broken as a resistance, it can act as a support and to be retested. It is the same as when a Fibonacci retracement level becomes broken as a support (it can act as a resistance then).
It is proven that the effect of Fibonacci retracement have on the market is not negligible and in fact is highly considerable.
Why Fibonacci numbers have such a big effect on the market. Why the prices become stopped sometimes for several days below or above the Fibonacci levels?
Fibonacci was originally investigating the pace at which rabbit will multiply when breeding when he made his mathematic discovery. The Fibonacci ratios play an important role in nature and in Biology it is discovered that the numbers are used in the formation of our body, from our genes (DNA molecule) to our internal and external organs, So they are also effective in our behavior. And the price of the market goes up and down because of the behavior of the traders: Buying and Selling >>> Bulls and Bears
Consequently, the market has to show reactions to the Fibonacci levels.
Let us review the Fibonacci retracement in our stock market.
The 1997 monetary crisis, brought the KLSE Composite to a low of 261.33 by September 1998 (point B). From the top at Point A (1278,94 on March 1997) to point B, the market rebound way above the 61.8% level to point C. (979.10 a February 2000), but it don’t touch 78.4% level. Such a moved could be attributed to a sharp market fall during the monetary crisis and within a short period i.e. in 18 months.The market subsequently corrected downward to point D (at 547.72 May 2001).
Than from hereon, the market had a long bull run that ended in January 2008 at 1,452.57 point. From this point we could extrapolated base on past historical market movement that the market could fall to a Fibo retracement of 61.8% or 78.4%.
If we base on a retracement from point D-E, the 61.8% retarcement level is already violated and the 78.4% retracement level is at 760.5. On the basis of point B-E, the market is expected to touch the 50% level at 889 and than to 61.8% level at 739 point.
Base on on the last major bear market n 1997-1998, the index is expected to recover before the final plunged. The most probable support level is expected at 750 point. At current level of 905.3, the market has about 17.0% more to go.
From looking at the KLSE Composite index and using the Fibonacci analysis, we could probably expecting that our economy is following Singapore into recession or a very low growth rate. Remember that from my last post, our market reach its height in January 2008, while for Singapore and US the high was reached in October 2007.
The Limp and the dimwits have been harping that our economy is very resilient to the current credit crisis. Hope the dimwits have the facts right.
