The Fibonacci Sequence: Unveiling Hidden Order in the Markets
Best use and elements to consider, case studies for SPX, NVDA, TSLA, NDX, IWM and META
The Fibonacci sequence, a seemingly simple series of numbers discovered by the Italian mathematician Leonardo Fibonacci in the 13th century, has surprisingly profound implications in the financial world. This edition will explore the Fibonacci sequence, its core ratios, and how traders can utilize this concept for technical analysis in the stock market.
Demystifying the Fibonacci Sequence
The Fibonacci sequence is a mathematical formula where each number is the sum of the two preceding numbers. It begins with 0 and 1, and the sequence progresses as follows: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, etc. Interestingly, the ratio of successive numbers in the Fibonacci sequence approaches a value known as the golden ratio (φ or phi), which is approximately equal to 1.618. This ratio and other key Fibonacci ratios (such as 0.382, 0.5, 0.618, and 1.0) are believed to hold significance in various natural phenomena and even financial markets.
Applying Fibonacci Ratios in Trading
Technical analysts utilize Fibonacci retracements and extensions to identify potential support and resistance levels for stock prices. This edition will study Fibonacci retracements:
Fibonacci Retracements: After a significant price movement (upward or downward), traders identify retracement levels based on Fibonacci ratios. These levels represent areas where the price might encounter temporary pauses or reversals before continuing its trend. Common retracement levels include 38.2%, 50%, and 61.8%. For instance, following a strong price surge, a retracement to the 38.2% level might indicate a potential buying opportunity if the price finds support there.
SPX Daily Chart: This is a good example of how this technical indicator works; the 38.2% is among the most common levels analyzed, however 23.6% is a first reversal level that worked well as support during the recent decline in SP500, see in the chart the relevance if this level.
