<s> Stocks & Commodities V. 2:2 (66-73): FIBONACCI FORECAST EXAMPLES by Tucker J. Emmett
FIBONACCI FORECAST EXAMPLESby Tucker J. Emmett
I
have a system that I use, with great success, for making short and long term predictions for various
segments of the futures market. Recently, I have been asked repeatedly for more descriptive informationconcerning my system and techniques, and this article is my reply. In it, I will first briefly describe thetheory, and then devote most of the article to examples of the proper application of my own Fibonaccitechniques. These techniques I have researched over the past ten years and have tested empirically in thefutures markets. I will highlight what to look for.For a more thorough discussion of the theory and principles behind the application of the Fibonacci seriesto the futures and stock markets, you may want to refer to my Fibonacci Forecast or some otherFibonacci reference.The Fibonacci Series is a succession of integers as follows: 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, . . . etc.,each successive number in the series being the sum of the two previous. The ratio between successivenumbers in the series approaches .618, or inversely, 1.618. These ratios are extremely important.My Fibonacci approach to the futures markets involves subdividing each market into three specificcategories: Pattern, Ratio, and Time.(1) Pattern -- This refers to the wave pattern that every market is continually in the process of creatingthe number of waves up, versus the number of waves down. Each bull move, to complete itself, musthave three major waves upward, interspersed by two major corrections, for a total of five major legs.Since each of these major waves can be also subdivided, I continually analyze the wave picture beingprovided by a given market to ascertain when a full wave pattern has been completed. This is a majorclue in determining when a market has definitely topped out or bottomed out. A bear market is not quite amirror image of a bull market, but the wave pattern count remains the same, although the patternsthemselves vary a bit. It is the count that is of prime importance.(2) Ratio -- This refers to the ratio between the successive bull waves and their corrections, and the bearwaves and their corrections. The various waves should relate to each other based upon the Fibonacciratios mentioned (not forgetting that the first part of the series provides '1' as a ratio, also). When you
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Stocks & Commodities V. 2:2 (66-73): FIBONACCI FORECAST EXAMPLES by Tucker J. Emmett
have wave pattern that correlates to the proper ratios, you then have a second major clue that you havefound a major (or intermediate) top or bottom to a market.(3) Time -- The third category, and perhaps the most decisive of the three, is the time frame during whicha market carries out its bull or bear price action. Many years ago, I adopted the term 'cycle' to describe thetime frame between price swings, this term is generally used by the trade today. 'Cycle' was used becausethe markets appear to complete a full bull move, or a full bear move, within a specific time cycle. Andthis time cycle is delineated by the Fibonacci series itself. Since, for my clients, I am concerned largelyabout the longer term cycles, I generally ignore the shorter term (3 day, 5 day, 8 day, 13 day) cycles, andconcentrate on the 3 week (21 day), 5 week (34 day), 8 week (55 day), 13 week (89 day), 21 week (144day) and so on. The longer term cycles tend to mark the major turning points of markets, and naturallythe major turning points are what all traders are gunning for.So in summation (again, I am oversimplifying somewhat to assist those new to the markets inunderstanding a new idea),when you have a wave pattern that appears to have fulfilled its minor andmajor wave counts; when the price objectives have been satisfied as predicted by the ratio measurementsbetween successive waves; and when your time cycle appears to have been fulfilled, and therefore a newchange in cycle trend can be expected -- then you have satisfied all three of my Fibonacci categories. Thereliability factor of any trade entered at this juncture is extremely good, and the 'Profit to Risk' factor willbe enormously in your favor.Now for the examples -- I am simply going to go over several major markets and show you how I havetraded them with this Fibonacci approach.LIVE HOGS:This is one of my favorite markets, both for larger managed accounts, as well as for smaller ones.Referring to Chart 1, note that the 40.50 level in October of 1983 gave us the perfect point to reverseshorts and go long, because all three categories had been satisfied, and they had been satisfied extremelyaccurately. First, the pattern was easily seen and easily delineated -- price completed two major wavesdown (A-A' and B-B') and was therefore in its third and final major wave down (C-C'). We knew thatwhen this wave was halted, our big bear market would be at an end.
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Stocks & Commodities V. 2:2 (66-73): FIBONACCI FORECAST EXAMPLES by Tucker J. Emmett
Where was it likely to halt? Since 1.618 of leg A-A' gave us precisely our objective for the length of legB-B', then 1.618 of leg B-B' should give us our objective for the length of leg C-C'. This works out to40.50. We now had two of our categories apparently satisfied -- We established that price was in a thirdmajor wave down, and that the proper maximum objective for this third wave was 40.50.Our third category, the time cycle, then fell nicely into place. Price had completed a full 89 weeks fromthe previous major low in December of 1981, and a 55-week completion from the top of the market.Hence with the Fibonacci pattern at an apparent completion the Fibonacci ratios reached by the priceobjectives being met, and the Fibonacci time cycle completed, my analysis indicated that all marketforces would combine to drive the hog market abruptly and dramatically higher; and this is whathappened.Now for a bit of ongoing prediction: Once this first wave-up we are now in has been completed, the ratioretracement should bring price back to about the $.46 level, which would be my next buy-in point for asecond wave upwards. The reason is this: From the lows in the hogs at $ .29 during 1980, there have beentwo major waves upwards in the grand cycle (labeled I and II).. This implies that we must have a thirdmajor wave upwards to take out the $ .68 highs from a year ago, before the entire bull cycle will havebeen completed.Now that you know we are likely to be in a bull market for hogs for the next year or so, it makes buyingthe dips a little easier; there should be plenty of room left on the upside, to say the least.LIVE CATTLE:The cattle market fell right into place very nicely although the bottom at A was several weeks premature,
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Stocks & Commodities V. 2:2 (66-73): FIBONACCI FORECAST EXAMPLES by Tucker J. Emmett
based on the long term 233-week cycle I was waiting for. (This cycle represented the end of the entiresideways market we have had since the highs were made in cattle more than four years ago.) On Chart 2,you can see the three waves downwards very nicely marked out, going into the 233-week cycle. Then thefirst major wave up (I) with its correction (just about 61.8%), followed by our second wave up (II) withits ratio projection to the 70.50 level. After the correction to this wave, we will be ready to buy into themarket again for the third wave up. This should take us up through old highs to the $ .80 level. Theabsolute top will be at hand when the pattern has been completed, price ratios from wave II have beensatisfied, and the 'up' time cycle has been completed.
GOLD AND SILVER:The precious metal markets have, as should be no surprise, extremely similar cycle frameworks. Goldand silver both topped out on the 34-week cycle from the bottom. And at that point, the silver market hadperfectly satisfied each of my three Fibonacci categories. The pattern delineation was perfect. It hadcompleted minor wave 1, minor wave 2, and was in a third subwave (z) of minor wave 3, subwaves x andy having been completed. The 1.618 ratio objectives of wave 2 gave an upside target of 14.00, and the1.618 ratios objectives of subwave Y gave a target of 15.00, confirming my original target. Hence, wehad pattern completion, ratio completion, and cycle completion, and the market collapsed five dollarslower within the next two weeks, a dramatic example of my Fibonacci techniques at their best.To continue the analysis for silver, the current down cycle should be coming very near its end. We havehad two major down moves (I and II) and are now in III, the final leg down. The strong up cycle shouldbegin once we have passed the 55-week pivot point (89 weeks from previous low). Our price objectivesat $8.00 represent the 61.896 correction of the first major leg up from $5 to $15; since that representedonly the first major wave up, which will take out the $15 and keep going up to the next ratio objective.We thus have the ratio, are very near cycle completion, and very close to a pattern completion -- all
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Stocks & Commodities V. 2:2 (66-73): FIBONACCI FORECAST EXAMPLES by Tucker J. Emmett
systems should be ready for purchases in a short period of time.Likewise on the gold futures -- we are nearing pattern completion, cycle completion, and the 61.8 ratiohas already hit. When the cycle has passed, I hope to be fully committed to the long side for the nextmajor move up, which will take out the $500 level and keep going.SUGAR:The sugar market last year was predicted extremely well by these Fibonacci cycles. It has several unusualfeatures worth noting, however. The 233 long term cycle actually bottomed the market out after the firstleg up (I) had been accomplished. So I had to watch leg (I) move up and come back again before I felt Icould safely buy the market. The price exploded out of my 233-week cycle lows very nicely reaping somehuge profits on its way up to leg II (which surpassed my 1.618 ratio objectives by 150 points). The nextmajor buy point should be the 55-week cycle lows to be made the first week of February. If the patternand ratios look proper at that point, we should then be ready for the beginning of wave III with maximumobjectives up near the $ .20 level. Always, of course, be alert when a major cycle low is violated to thedownside -- unless your ratio or pattern provides the explanation for such an occurrence, you are betteroff on the sidelines.
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Stocks & Commodities V. 2:2 (66-73): FIBONACCI FORECAST EXAMPLES by Tucker J. Emmett
SWISS FRANC:A question that frequently arises is, how safe is it to make a trade when you have only one, or two out ofmy three categories satisfied? The answer is, you have decreased your degree of certainty by precisely thecategory that has not been satisfied.An extremely good example is the Swiss Franc. At this time, we have the apparency of a perfect longterm and a near term pattern completion, as well as a good ratio completion. The 1981 lows were majorwave I, the 1982 lows were major wave II, and we have just taken out the major wave II lows when the
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Stocks & Commodities V. 2:2 (66-73): FIBONACCI FORECAST EXAMPLES by Tucker J. Emmett
March Swiss Franc went to 44.70. Thus we finally have ourselves a major III. Moreover, we have threeminor waves downwards (waves 1 through 5 being the correct subdivisions of Major III), so there is astrong probability that Major III has run its course. In addition, we have satisfied one of the minor ratioobjectives (1.618 of leg 1 giving us the aformentioned 44.70 objectives). So at least two of the necessarycategories seem to have been satisfied. But there is no clearly discernible time cycle that is bottoming out.Thus we are missing one of the major prerequisites for a high profit - low risk trade. With such afine-looking pattern and ratio presented to me, I would be buying the market for a move up, but I wouldbe using very close stops under recent lows, in case wave III should give us an 'extension' into lowerterritory.WHEAT:Another example of a market with a perfect pattern and ratio delineation, whose cycle framework is a bit'out of sync.' You can see the three major waves up, and we are now working on the three major wavesdown, wave 1 has been completed as has wave 2, and we are now in third and final wave 3. Ratioobjectives for wave 3 (from 1.618 of wave 1) are at $3.15. But the next time cycle does not hit until earlyMarch, 55 weeks out from 'K', which was the turnaround pivot point of a longer term cycle. If we hit$3.15 before early March, and the subwaves of wave 3 downward are all in place, then shorts can becovered and longs initiated, although conservative traders would be wise to await the completion of the55-week cycle to achieve a greater degree of certainty.
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Stocks & Commodities V. 2:2 (66-73): FIBONACCI FORECAST EXAMPLES by Tucker J. Emmett
SOYBEANS:The recent downtrend in soybeans has been a thing of beauty. The pattern has been easy to follow. Weare currently in wave 3 of wave II (i.e., we are about to complete the final minor wave downwards of thesecond major leg downwards), at which point we should see a nice sharp rally upwards to the 61.8%retracement level, and then final Wave III to the downside going into the next major 55-week cycleduring March.The Downtrend in beans has been particularly rewarding to trade, since there were three separate anddistinct 61.8 retracements (as outlined) which gave everyone an opportunity to sell short on good rallies,if they missed selling the top.The downside objectives are as follows: 'A' represents the 61.8% correction of the move up from July of1983, and 'B ' represents the 61.8% correction of the entire move from the lows of October of 1982.Therefore on a near term basis, we should see a rally upwards in the beans once the $7.20 level is hit, but
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Stocks & Commodities V. 2:2 (66-73): FIBONACCI FORECAST EXAMPLES by Tucker J. Emmett
we must wait to see the completion of the 55-week cycle before we can be confident that we areembarked upon a new move to the upside that will take out the $9.50 level.Summary:To sum it all up, my Fibonacci approach is based upon an accurate analysis of the Pattern, Time, andRatio of each market involved. In my eleven years of trading, both for myself and my customers, I havefound no more accurate or helpful system than this application of the Fibonacci series to the futuresmarkets.Tucker Emmett is a cum laude graduate from Harvard University where he studied mathematics andeconomics. In 1970 he was awarded the Juris Doctor degree from the University of Virginia Law School.He is a registered representative in securities and commodities and is a member of the ChicagoMercantile Exchange. He writes a bi-weekly review published by Anspacher on grains, meats, metals,and currencies.
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