In theory, this method is quite simple. When looking at a daily commodity price chart, ( see Example 1 ) identify two market peaks or lows, then count the trading days in between the two established points. You then multiply the number of trading days by 1.618. Then take that number and count that many trading days from the second peak or low. This will give you the approximate turning point in that market. .
Example: 10 trading days between peaks (x) 1.618 = 16 trading days.
Approximately 16 trading days from the second peak should be a reversal day.
If prices have been rallying up to the indicated reversal point, a decline can be expected. Likewise, if prices have been declining to the reversal point, a rally can be anticipated. This method gives no indication for the duration of the reversal, but there are other techniques in this section that may help in that regard.
The Fibonacci method will often pick market reversals to the day, but this will not happen every time. Remember this is not an exact science, the reversal may come within a day or two of the projected signal. The more significant the high or low points are - meaning the greater number of days leading up to the points and back from the chosen highs or lows, also the greater number of days between the two points, will add credibility to these reversal methods. A minimum of seven trading days between the two peaks or lows is suggested. ( See example 2 )
( Example 1 )
The chart above shows how the Fibonacci method works. You'll notice the market did not reverse on the exact day projected, and there was even one higher close after the reversal was called for. Keep in mind this is a tool not an exact science. Also, be aware that certain markets, such as wheat or any grain, often trade of off weather, export news and other factors that these methods have no possible way of foreseeing.
( Example 2 )
