13th
Fibonacci, Elliott Wave and the Dry Bulk markets collapse
Fibonacci, Elliott Wave and the Dry Bulk markets collapse.
First off, YES, I have worked as an FFA broker and as a trader…. but …. NO, this post is not intended as trading advice or even to cover all possible angles as to what is happening or what might happen… it is intended to give a few notes on some technical analysis that might be of interest; to whet your appetite; to get you wondering…but please note that there are many aspects to technical analysis and none should be used in isolation.
So let’s start with Fibonacci.
If you’re not familiar with Fibonacci, he was a 13th century maths whizz and he is credited with discovering a particular sequence of numbers, known as Fibonacci numbers (although the sequence was probably known about several centuries before)
The sequence is actually really simple: 1, 1, 2, 3, 5, 8, 13, 21, 34 etc. etc. (The next number in the sequence is found by adding the preceding two numbers together 1+1 = 2 / 1+ 2 = 3 / 2 + 3 = 5 etc)
The amazing thing about this series is the number of areas in life and nature where things ‘happen’ on Fibonacci series numbers…
The ‘Golden Ratio’ (Fn+1 to Fn = 1.6180339) is a constant of nature and appears in art, architecture, science and trading as we’ll see below.
Now… Elliott.
In the late 1930’s ‘The Wave Principle’ was published and is now known as The Elliott Wave Principle. You can read more on Wikipedia
The theory has 3 elements: pattern, ratio and time -
1. Pattern (the most important part of the theory):
This graph shows one complete ‘wave cycle’. There are 8 waves: 5 up and 3 down. Waves 1, 3, 5 are called the impulse waves - they are rising, whereas waves 2 and 4 are corrective waves (they correct waves 1 and 3) After this numbered phase, a wave correction is shown (a, b and c)
This graph is a simple example of market movement - the bit to understand here is that these waves display a particular pattern… The number of impulse waves are not just random - they are part of the Fibonacci sequence… Whether the wave develops with 3 or 5 waves depends on the direction of the next, larger wave.
The key to this is determining where you are on the wave cycle. So, if you believe that a market has completed a five wave move, then you would surmise that there’s more to come as part of a larger wave. However, it could be that it was the fifth of a fifth: but… the theory states that a correction can never take place in five waves.
So, in a bear market, such as we are seeing with the Capesizes and BDI at the moment, if we see a 3 wave advance, we would expect that to be followed by a resumption in the downtrend… whereas a 5 wave rally would indicate a bigger move up and could signify a turn and the first wave in a new bull trend.
2. Ratio:
We have seen how a Fibonacci series is created. It is also interesting to note the ratio of any number in the series to its next number up in the series. This ratio approaches 0.618 (see the Golden Ratio above!) after the first 4 numbers. So : 1/1 = 1.00, 1/2 = 0.50, 2/3 = 0.67, 3/5 = 0.60, 5/8 = 0.625 etc… The first 3 (1.00 / 0.50 / 0.67) are important numbers to traders as they are used as retracement targets. (Markets usually retrace their previous moves by predictable percentages and the best known sequence is 33%, 50%, 67% - Fibonacci ratios refine those retracement points to 38.2%, 50%, 61.8%)
This graph shows an example:
The ratio of any number in the series to its next number down in the series is the inverse of what we have just seen - ie, 1.618
Waves always display Fibonacci numbers. One cycle is 8 waves - 5 up and 3 down.
3. Time: (the least important part of the wave theory):
and therefore, nothing to say here, but, if you’re interested, check out the Wikipedia link above…
So, how does this relate to the BDI?
Well… as the BDI is still falling, we haven’t hit a low point from which to record a potential retracement yet, but when the market does record a turn in direction (watch day 34 with interest…) then it’s calculators out and watch to see how many days the market climbs for to determine if the tide has indeed turned, or whether there is more downwards pressure to come.
What about longer term direction finding in the pattern?
The graph below shows weekly settlements of BDI - can you spot a wave pattern? You can see some corrective wave examples here
For more reading on technical analysis we would recommend:
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