By: Tom Gentile
on August 2nd, 2022
The Fibonacci Sequence
Leonardo de Pisa, known as Fibonacci, is a well-regarded mathematicians from the Middle Ages. He came up with the Fibonacci numbers or the sequence of numbers.
The series of numbers starting with 0 and 1, and each subsequent number is the sum of its two predecessors.
You can really get consumed in analyzing the Fibonacci sequence and your head may spin by reading something like this: In the sequence, each fourth number can be divided by 2, every fifth number can be divided by 5 and every eighth number can be divided by 8. Multiplying any number in the Fibonacci number sequence by 1,618 (Golden Ratio) gives the next number approximately.
We plan on keeping the definition and explanation to the minimum we’ve already included in this educational piece.
Fibonacci and the Financial Markets
Fibonacci can be found in nature and the human body, but where we actually search it out is in technical analysis of financial market securities.
Many charting programs have a Fibonacci Tool (some may refer to it as a Fibonacci retracement tool as it is used to see potential upcoming price levels a security will retrace to – up or down).
It is used as a tool to forecast price movement. After a run up in price or a run down in price, one can plot the Fib tool on the chart analyzing a price low to a price high in an uptrend or a price high to a price low in a downtrend.
One then tries to see what percentage price retracement zone based on Fibonacci the security may retrace to.
And like any technical analysis, if enough people use it – in this case Fibonacci – the more likely it is to work.
Three common Retracement Numbers / Percentages in Fibonacci Analysis
The three percentage our software uses are 38.2%, 50%, and 61.8%.
50% is not a number in the Fibonacci sequence, but that percentage works so much, (because investors and traders use so much) that it is programmed in to many software’s Fibonacci tool.
There are other Fibonacci numbers / percentage that can be used. There are different securities that respond to a certain percentage more often than other percentages so to say there is one Fibonacci number that works better than the rest can be argued, but not really ascertained, (in our view).
Fibonacci on the SPY
You can use any time frame you like in your analysis (our tools defaults to a 150-period look back. A period for us is usually a trading day).
The tool again takes a price low to a price high in an uptrend or a price high to a price low in a downtrend. Looking to see a possible area the SPY would retrace to over this 150-period of time we can see it may be at a resistance point right now.
SPY is at the 38.2% retracement level (the tools also give the security price at that percentage level).
One additional thing that can be considered now is to assess a price level SPY could roll over or down to if this 38.2% Fibonacci level becomes resistance.
Zoom in the date range of the recent up trend leg and plot the Fibonacci tool on the chart and one can see the Fibonacci retracement levels over that range of days.
Which zone will it retrace to? That is to be determined.
The SPY may not roll over at this price level. It may continue higher as there is a 50% and a 61.8% Fib level higher on the chart.
App: Toms Option Tools
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