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Fibonacci Retracement Level Warns Of Market Top at Trader’s Narrative





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I neglected to write about the approaching Fibonacci level in April because I assumed that most of my readers would have seen it coming from a mile away. But perhaps it did deserve our attention more than we thought, especially considering the jolt that we got from the “flash crash”.

The 61.8% Fibonacci retracement from the 2007 market top and the March 2009 bottom projected to 1225.70 for the S&P 500 index:

Fibonacci level SPX500 cyclical market top May 2010

These levels are watched by technical oriented traders because they believe that it is at these levels that the trend will exhaust itself and reverse. The S&P 500 didn’t quite reach that level, only managing an intra-day high of 1219.80 in April 2010.

If we go below the February lows, then we will have not only a lower high but also a lower low -the definition of a down trend. We are still quite a ways away but if we see step into an empty elevator shaft again like we did on May 6th it will be a lot closer.

One of the people who did have a very close eye on the 61.8% Fibonacci retracement level was Robert Prechter. He used that as one of his main rationales for exiting the long position he had in March 2009 in US equities.

In the recent EWI Theorist, Prechter explains why he believes this is not only the end of the secular bear market rally which he foresaw in February 2009 but more importantly, why it is a major top which will take prices down much further than most imagine:

This rally has been sharp, but it has gone on too long to fit into a four-year cycle profile, so we have to treat the 4-year cycle as also gone.

Prechter then outlines the longer time cycle which he believes is in effect now. If you’re curious about market cycles or are a fan of cycle theory, you’ll especially enjoy what follows.

The Fibonacci retracement level applied to the Dow Jones Industrial also provided a cautionary signal:

Fibonacci Dow Jones level cyclical bull May 2010
Source: The April-May Theorist - “Deadly Bearish Big Picture”

As I explained to a reader who criticized Elliott Wave theory, I defer to the results. Prechter has the distinction of making a clear and timely call ahead of the March 2009 bottom. And then he started to make very bearish sounding noises last month. While most people recognize in him an uber-bear, he has shown an uncanny ability to dodge and weave, accommodating himself to the market environment as it changes, rather than insisting that the market adapt to his views. So for that reason, he has a hot hand and my attention. In any case, there is no obligation, the analysis is there for the taking for free.

There are a myriad paths to market analysis and I try to stay humble and not allow prejudice to keep me from considering any one particular path. Especially one that yields results and provides a real understanding of the dynamic forces at play. To those that lock themselves up within only one dogmatic viewpoint I offer you this eloquent and timeless advice from Bruce Lee:

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11 Responses to “Fibonacci Retracement Level Warns Of Market Top”  

  1. 1 Jimmy

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    I agreed if Prechter has been around this long, for his sake he likely learned from mistakes and improved on his work. I used to subscribe to him (for a year) back in the early 2000s…after the dot com bubble…but didn’t benefit from his work. As a seasoned trader now I have learned from my past mistakes and benefiting from my improved trading strategy and money management.

  2. 2 David Walter

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    Have you considered the possibility that because so many technical traders believe something (i.e., Fibonacci numbers, retracements, etc.) that they can cause the adjustment they believe in for some short period of time.

    Point is that many technical traders don’t use Fibonacci numbers, but use trend line supports, ma, etc.. Right now we’re sitting on major trend line support on the weekly SP500 chart.

    Its time to see if the latter group has more adherents than the Fibonacci group of traders.

  3. 3 Sharpe Trader

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    Mr. Prechter has lost a lot of people a lot of money through his advice.

    Many former subscribers have released their frustrations with EWI across the Internet.

    After reading their comments, it’s hard to give any ear to Mr. Prechter, let alone be able to look at him without a feeling of disgust.

    That is all I have to say.

  4. 4 b.

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    I believe Pretcher went public with a significant shot position at the 1115 level (Fib 50), and we’re just about now -1.5% below it, nothing spectacular. With good risk management, I know I enjoyed most of the Feb-Apr run, and was stopped out on all my positions by end of Apr, early May. I know I am not an exception, many seasoned traders enjoyed the run up and were stopped out by early May.

    Like anyone who predicts this market (rather than trades it), over the years he has made some great calls and some v. poor ones.

    best wishes,
    t.

  5. 5 Elizabeth

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    One of the most valuable sites that I have found to objectively analyze the performance of people like Prechter is cxoadvisory.com.

    Here is their analysis of his record: http://www.cxoadvisory.com/individual-gurus/robert-prechter/

    As you can see, he earns an accuracy rating of 28– below average. So the upshot is–if you had been on the other side of Prechter’s calls, you would have made money 72 percent of the time. That’s a pretty atrocious record for him.

    I have used Fibonnacci in my trading, but have found Prechter’s calls to differ from my own reading of Eliot Wave as Fib. analysis is very subjective as we all know.

  6. 6 Wes

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    Babak,

    I’m curious about what a trader would change if he knew that the Dow would end the year 1000 points higher or lower.

    Would you change anything ?

    I’m always trying to make money over the next few days and can’t see where this long term knowledge offers me an advantage.

    How about you ?

  7. 7 AU

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    David, trendline was broken during the ‘flash crash’ week, and right now we have a congestion of moving averages which usually leads to a sharp move.

  8. 8 Mike C

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    As I explained to a reader who criticized Elliott Wave theory, I defer to the results. Prechter has the distinction of making a clear and timely call ahead of the March 2009 bottom. And then he started to make very bearish sounding noises last month. While most people recognize in him an uber-bear, he has shown an uncanny ability to dodge and weave, accommodating himself to the market environment as it changes, rather than insisting that the market adapt to his views. So for that reason, he has a hot hand and my attention.

    Difference of opinion on Prechter and Elliott Wave I suppose:

    Q: What do you think about the Elliot Wave Theory prediction that we are in the midst of a grand super-cycle correction to …….?

    J: I am not convinced. The underlying theory lacks intellectual and evidentiary support. The results are erratic and very subjective. This is from technical analyst David Aronson:

    The Elliott Wave Principle, as popularly practiced, is not a legitimate theory, but a story, and a compelling one that is eloquently told by Robert Prechter. The account is especially persuasive because EWP has the seemingly remarkable ability to fit any segment of market history down to its most minute fluctuations. I contend this is made possible by the method’s loosely defined rules and the ability to postulate a large number of nested waves of varying magnitude. This gives the Elliott analyst the same freedom and flexibility that allowed pre-Copernican astronomers to explain all observed planet movements even though their underlying theory of an Earth-centered universe was wrong.

    The long-term results have been terrible, but the method is getting recent buzz since Robert Prechter called two recent moves for followers who had any money left. This is very dangerous, because many observers look to systems that are “hot.”

    So what do we pay closer attention to. The recent “hot hand” and some good calls or the terrible long-term record?

  9. 9 MachineGhost

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    Unlike Elliott Wave, the Fibonacci ratios actually have a basis in reality. They are approximations of specific astrological phenomenom (yes, astrology!).

  10. 10 Babak

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    MG, the Fibonacci sequences are based on biological patterns all around us here on earth and have nothing to do with astrology which is based on myths and legends. Maybe you were thinking of astronomy which is based on scientific principles.

  11. 11 MachineGhost

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    Well, I guess it depends on what one means by “astrology”. All astrology is based on astrophysics, but the subjective interpretation of such is where it turns into “myths and legend”. In this particular case, I was referring to what is considered “financial astrology” which would not necessarily be “myths and legends” if one uses the quantitative approach. Close inspection of the so-called Fibonnaci ratios will show that they are approximate properties of certain astronomical phenomenom. Now, if that observation turns what is scientifically measurable into “financial astrology” because one is implying such has an effect on biology for where there is no currently accepted theory, then it is no more absurd than “technical analysis is voodoo”, including Elliott Wave.

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