Understanding Fibonacci’s Relative Retracement

Interesting discussion by MarketWatch’s Tomi Kilgore on Fib retracements:

A 13th-century mathematician pen-named Fibonacci wrote about a ratio — 0.618 — that he found to be prevalent in natural systems ranging from rabbit breeding pattern, a snails shell and flower petals.

Given that many see the financial markets as an amalgamation of living traders and investors, chart watchers have adopted this ratio, and other Fibonacci ratios such as 50% and 38.2% (1 minus 0.618), as a guide for so-called retracements.

It is believed that until the 61.8% retracement target is surpassed, a market is still governed by the previous trend. Once it is surpassed, a new market is born.

At its Jan. 6 high, the Nasdaq had retraced just 30.4% of the decline from its all-time high to the October 2002 low, which is still well short of the first major Fibonacci retracement target 38.2%, or 2,645.67.

In comparison, the Dow industrials have at its current level of around 11,070 retraced about 85% of the bear market decline from the January 2000 high of 11,750 to the October 2002 low of 7,197. The S&P 500 Index last at 1,282, has retraced 65% of its fall from the Mar. 24, 2000 high of 1,553.11 to the Oct. 10, 2002 low of 768.67.

The Nasdaq still has to climb 38% from current levels to reach even the 50% retracement target of 3,120.51. To get to the 61.8% target of 3,595.34, it would have to run up another 59% from the current price, or more than triple off its October 2002 low.
And to retrace the entire move, the Nasdaq still has another 127% to go.

That’s a long way to go, even for an optimist. Maybe it can be a goal for the tenth anniversary?

More than a Pen name, Leonardo of Pisa was (according to Wikipedia) posthumously given the nickname Fibonacci (for filius Bonacci, son of Bonacci)

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Source:
Nasdaq still has a long way to go
One-third full, or two-thirds empty?

Tomi Kilgore
MarketWatch, 3:30 PM ET Mar 10, 2006
http://tinyurl.com/hvz6x

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