As you recall, last week we discussed an amazing man by the name of Fibonacci and the principals of the series of numbers he is credited with discovering.
In this section, we will look at the Fibonacci arc and it's use in technical analysis. These are usually done with the aid of a computer program but if you keep your charts on paper you can still construct these with the use of a compass.
Arcs are drawn by first determining two distinct points on a chart. Usually this is a distinct low or bottom and a corresponding high or top. The difference between these two points must then be multiplied by the Fibonacci ratio numbers of 38.2%, 50.0% and 61.8%. The arcs are then superimposed on the chart with the corresponding arcs going through the numbers derived from the three ratios.
The interpretation of the arcs is to help locate support areas after a primary move up and resistance areas after a primary move down. When prices move to the area of the arcs you should expect support or resistance to take place in that area.
If the prices moves to the point where it is intersecting the arc, it may be enough to end the correction and send prices back in the direction of the primary move. Or it may just be a temporary change in direction with prices returning, passing through the arc line and moving to the next arc line for a test of the next arc line level.
Fibonacci Fans
Fibonacci fan lines are drawn in a very similar way as the arc lines. You must correctly pick the low and the high of the move you are analyzing and the 3 lines are then drawn using
the Fibonacci ratios of 38.2%, 50.0% and 61.8%.
As prices retreat, they are met by resistance or support in the area of the drawn lines. Many times prices will fall to the lowest area of 61.8% and then start back, resuming the primary trend or move only to meet resistance at the 38.2% or the 50.0% area.
Many technicians use a combination of arcs and lines to anticipate probable support and resistance areas. First you would plot the arcs and lines and study where the lines intersect or cross. You would anticipate a potential change in direction of prices where price meets the intersection of the
arc lines and fan lines.
Fibonacci Time Series
The Fibonacci time series is a method of timing the underlying stock or market by time; not by price. It is constructed with a low and a high being recognized by the analyst and then applying the Fibonacci numerical intervals of 1, 2, 3, 5, 13 etc.
The Fibonacci times series lines are drawn as vertically lines when displayed on a computer screen chart. The idea, in using this method, is you are looking for changes in price direction for the underlying at or near the time series lines.
If you have the bottom and the top correctly labeled these will quite often help you anticipate WHEN the security may reverse direction and resume the primary move. The Fibonacci time series lines tell you nothing concerning prices.
Using a combination of all the Fibonacci tools: retracements, arcs and fans, you have 3 methods to analyze possible price reversals and with the time series, one method for the length of time possibly required to reach those price levels.
You would also want to take into consideration additional indicators to aid in pinpointing a potential reversal point.