GUIDE-POSTS:

Whatwill, and what will not, be covered in the following chapters. WILL:

$ Basic Fibonacci Expansion and Retracement Analysis applied to the price axis.

$ My Interpretation of Advanced Fibonacci Expansion and Retracement Analysis applied to the price axis, i.e. "DiNapoliLevels."

WILL NOT:

Any application whatsoever ofFibonacci analysis to the time axis

The utilization ofFibonacci numbers in any way (I use certain ratios only)

Fibonacci Ovals

Fibonacci Arcs

Fibonacci Spirals

Fibonacci-inspired Bands

Fibonacci-inspiredTrendlines

The comparatively minor Fibonacci ratios such as .09, .146, .236, .5.0,

1.382, 2.618, etc.

The topics that I'm not covering are interesting. Some have merit in their own right. However my experience, research, and direct application to trading strongly suggest that they aren't worth the time they take to employ, particularly at this point in your learning curve. Since they unduly complicate the picture, I will concentrate only on those ideas and concepts which I have found to be the most useful andpractical.

Chart 8-1 depicts a down move from point A to point B. Retracement theory states that you measure the vertical distance of the wave between these two extremes of price, (points A and B) and calculate the .382 retracement of this move. At that point, there will definitely, and without doubt, be resistance (selling) to any up move.

Retracement theory does not say that prices must stop there, only that there will be

significant resistance to further movement.

If price action exceeds the .382 retracement level and continues up, there will definitely, and without doubt, be additional significant resistance at a .618 retracement of the same down wave. Will the market stop there? We don't know, but if you were looking to sell that market (context), either point would be an excellent level to initiate sell orders. If you

were looking for stop placement areas, hiding your stop behind either level would be a far better approach than picking an arbitrary money stop.

These are slang representations of retracement levels that are traceable back to early Gann work, which referred to 1/8 points as support or resistance levels 2 .

Fibnodes are numbers generated from the application of the above equations. Two (or more, as you will see) Fibnode pairs are created per market swing (wave). They will elicit support if they are approached from above or resistance if approached from below.

NOTE: I said extremes of this wave, not closes, not hourly medians, not the average of the last two highs before the standard deviation crossover of... get the idea? It's the high and low you are interested in!

BASIC FIBONACCI EXPANSION ANALYSIS UTILIZING THE THREE MAJOR EXPANSION RATIOS .618, 1.0, AND 1.618:

The mathematical relationships described by Expansion Analysis, control or specify the growth patterns of price, thereby providing you with Logical Price (profit) Objectives. We refer to these as Objective Points (OPs). Three targets or objectives can be calculated from any ABC Market Swing. The initial thrust may be up or down as in Chart 8-4. Typically, C is within the Market Swing of wave A B but that it is not an absolute necessity.

The formulas below are used to calculate these profit objectives. The price chart can then be extended from Point C in the direction of wave A B. These extensions are shown as dashed waves signifying the likely progressions of price.

OBJECTIVE POINT EQUATIONS

OP = B - A + C OBJECTIVE POINT

COP = .618 (B -A) + C CONTRACTED OBJECTIVE POINT

XOP = 1.618 (B - A) + C EXPANDED OBJECTIVE POINT

Some previous works on this subject, as well as certain well publicized theory, suggest that the expansion start at the B high or low, rather than at the Point C retracement. My research and experience lead me to disagree with this. Use Point C to begin your expansion. If the expansion on a down wave goes below zero, realize that negative numbers are not "recognized." Otherwise someone would be paying you to take their stock, or their corn, off their hands. Excluding certain tax shelters, I don't know where that occurs.

Expansion analysis says nothing about time. The dashed wave is shown achieving the various objectives at different times, for clarity only. In fact, it is possible for a given AB wave to reach all three Objective Points, after some reaction, likely against Fibnodes. In cases of strong Directional moves, price may go immediately to the XOP. The strength of the market during the AB leg, as well as the lack of strength or depth of the retracements on the BC leg, help us to determine which of the three price objective targets is initially met. OP stands for Objective Point; COP for Contracted Objective Point, since it is the smallest of the three possible objectives; XOP for Expanded Objective Point, since it is the largest. Generally speaking, OP targets are met more often than COP targets, before a significant retracement occurs. XOP targets are least frequently fulfilled.

There are other valid Fibonacci expansion ratios, but a trade off must be made between excessive clutter and proven reliability. My research and experience shows the expansions stated above are most reliable and most worthy of our attention This should become apparent when you see how these ratios are used, combined, and applied in the next chapter DiNapoli Levels.

FREQUENTLY ASKED QUESTIONS:

Could you discuss the concepts ofFibonacci arcs?

Although my area of expertise is Fibonacci analysis, that doesn't mean I use all aspects of applying this analysis to the markets. My specialization involves the practical application ofFibonacci analysis to the markets. In other words, how can we make money out of this.

I researched Fibonacci arcs back in 1989. They were not useful enough for me to include in my trading methodology. If you wish to pursue this path, the reference section contains material on this and related subjects.

You use a 7 day oscillator, a 7x5 and a 25x5 DisplacedMoving Average but 7 and 25 are not Fibonacci numbers. Why do you use them ?

I don't care if they're not Fibonacci numbers! Seven and 25 work in the studies you cited. I'm not a Fibonacci zealot. / use what works!

Why does Fibonacci theory work?

To some extent, it is a self-fulfilling prophecy since certain knowledgeable entities, both large and small, successfully employ it. That is not a sufficient explanation however. Fibonacci theory is natural law. All of us have our own tolerance for risk, pain, and fear. We also feel degrees of greed. While each of these feelings are expressed in varying degrees, the average of these emotions for a crowd are somehow quantified by these mathematical relationships, and faithfully expressed in the markets.