jun.yk.fibonacci.

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EQUITY

Absolut(e) Retracements
For technical analysts
who want to predict
market turns by using
Fibonacci numbers,
heres a technique
that minimizes
the guesswork
By Rick Bensignor

he pattern seems to repeat on one stock chart after

another: An equity reaches
an all-time-high price before
beginning to plunge. Then, almost
precisely when it has fallen by a specific percentage38.2 or 68.1 percentit hits its floor and begins to
bounce back up.
Whats happening? Technical analysts say an explanation can be found
in Fibonacci numbers, a near mystical sequence of numbers that often
seems to describe the behavior of
large systems, including financial
markets.
I wanted to follow up from an article I wrote early last year about using
Fibonacci retracements to help time
certain market turning points (Fibonacci Numbers Work in Mysterious
Ways, BLOOMBERG, February 1998).
Although much of that article was
dedicated to describing the Fibonacci sequence and the mathematics

FIGURE 1. Type DELL <Equity> GPO <Go>, tab down, adjust the RANGE field as shown,
and press <Go>. To draw absolute retracement lines, mouse-click on the Fibonacci key
on the Bar Chart screen. Click on the September 29, 1998, high and then on the dotted
line corresponding to a stock price of zero. To see the zero-price line, change the y-axis
scale by holding down the mouse button and dragging down prices on the right

behind it, the more useful part, as far

as a trader or salesperson is concerned, lay in how to apply Fibonacci
numbers to a chart. In this followup article, I review several examples
of a specific technique I introduced
briefly in that previous article. TD
Absolute Retracement, a retracement
measuring technique discovered by
well-known trading system and model
designer Tom DeMark, is useful
when charting a security thats trading
at an all-time high or a multiyear low.
First, some quick background
on the strange world of Fibonacci
numbers may be useful. Leonardo
Fibonacci was a 13th-century mathematician who brought to prominence the numerical sequence that
begins 1, 1, 2, 3, 5, 8, 13, 21, 34, 55,
89 and that goes on infinitely. The
pattern is: the sum of any two consecutive numbers equals the next
number in the sequence. Fibonacci
numbers frequently appear in nature: A daisy has 21 clockwise and 34
counterclockwise florets in the middle of the flower. A sunflower has
55 clockwise and 89 counterclockwise
florets. The ratios between Fibonacci
digits are significant as well. The relationship of any number in the sequence to the next highest number
approaches 0.618 after the first four
numbers; the relationship of alternate numbers approaches 0.382.
Those two decimals, which of course
add up to the number one, appear
frequently as ratios in market movements. Combined with other tools,
they can be clues that assist in finding the most profitable times to buy
and sell.
One obstacle to applying Fibonacci
numbers to stock charts has been the
problem of deciding which market
turning points to use as reference
points. Traditionally, recent top and
bottom prices for a stock are used as
Bloomberg June 1999 91

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Tip Box

that high with in order to

make your Fibonacci retracements: the most recent
low in January 1999? the
double-bottom low of early
October 98, when most
stocks tanked? the low of
September 1? June 4? April
27? You could pick whichever low
you felt like, calculate your retracements, and then hope that if the market sells off enough, it would hit one
of your retracement levels at the same
time some other technical buy signals
came in, so you could have more confidence in purchasing the security.
But that scenarios far too subjective. A more objective way to select
retracement points comes from absolute retracementsthe Fibonacci
retracement methodology created by
DeMark specifically for when securities are trading at all-time highs or
lows. Heres DeMarks technique,
which mechanizes the approach and
eliminates the guessing
game: when a stock, comtool modity, or currency is at
its all-time high, take raw
percentage figures of the actual high
price and calculate down. For an
example, figure 1 is a one-year chart

For an overview of the Fibonacci technical

analysis package available on the Bloomberg
service, type IDOC FIBONACCI <Go> 1 <Go>.
Type IDOC <Help> for more
information on the function

points between which to measure

percentage retracements. But you
shouldnt choose a retracement
point from a subjective viewing of
a chart; the points you pick to determine your retracements should be
made on some type of methodical
and consistent basis. If, for example,
a stock recently traded at its all-time
high and then began to sell off,
how would you choose which low
to compare that recent high with
in order to draw your Fibonacci
retracements? Type MRK <Equity>
GPO D <Go> to see a one-year bar
chart of Merck & Co. that illustrates
this point.

Absolute retracements arent

a trading system but a useful
Merck stock reached its all-timehigh price of 87.375 on March 19,
1999. Which low would you compare

FIGURE 2. Type MWD <Equity> GPO D <Go>. Draw absolute retracement lines
by using the high price on July 21, 1998. After changing the price range and drawing
the Fibonacci lines, you can double-mouse-click anywhere in the price graph to return
the graph to its original scale
92 June 1999 Bloomberg

of Dell Computer Corp. Lets look

back to the fall of 1998, when Dell was
climbing steadily in what was then
a succession of all-time highs. Come
the end of September, the stock
peaked just shy of 35 and then it
plummeted with the whole market
into the first week of October.
As the market sold off from its lateSeptember highs, from which low
would you have constructed your Fibonacci retracement: the September
1 low, the June 1 low, or the midMarch low? The answer is, none of
them. Because Dell had been at an
all-time high, you wouldnt measure
from some prior low, yet you would
use the popular Fibonacci numbers
of 38.2 percent and 61.8 percent.
How? By calculating those percentage levels against the high price itself.
For instance, the late-September
high was 34.625. Because that was an
all-time high, measure 0.618 and
0.382 of that high price. The resulting prices are 21.40 and 13.23. On
October 8, even though it closed at
24.22, Dell stock hit a low of 20.375,
just below a 38.2 percent sell-off.
The Fibonacci retracement held the
market and pointed to a major buy
opportunity.
Coincidence? Nonsense? Voodoo?
Look at the following additional
examples, and note, too, that theyre
not obscure, no-liquidity issues.
Figure 2 displays a one-year chart
of Morgan Stanley Dean Witter & Co.
At that time, the mid-July 1998 high
of 97.50 was the all-time high. As
shown in the previous example,
when a stocks at an all-time high you
should take 61.8 percent and 38.2
percent of that high price to calculate two retracement levels. Youd
come up with 60.26 and 37.25. Well,
the market stormed through the
first Fibonacci retracement level
60.26but stopped exactly at 38.2
percent of its all-time high.
Look at another brokerage stock
that had its problems in 1998: Merrill
Lynch. In figure 3, note the all-time
high in July 1998, at 109.125. Take
38.2 percent of that price, and you

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get 41.69. The stock closed slightly

lower than that figure in early October 1998 and then doubled in the
ensuing six weeks.
Publishing company Ziff-Davis is
another example. Just one day after
making its all-time high in December
1998, at 23.938, it sold off to 15
within one quarter point of a 38.2
percent retracement (0.618 X 23.938 =
14.79) and then instantly rallied
about 33 percent.

o does this method for

spotting market turning
points always work? No, no
form of analysis works every
time. Fibonacci retracements arent
a trading system, but when combined
with other indicators and ideas, they
can add to your arsenal.
One last thought: if this concept
works for measuring from all-time
highs, does it work from all-time
lows? It does, with slightly different
calculations. When a market has
been trashed and sells off to all-time
or multiyear lowsthe determination becomes slightly subjective on
your partfind the lowest low and
measure 138.2 percent and 161.8
percent of that low price. Those levels often act as ceilings for rebounds
off the all-time lows.
For example, look at the weekly
chart of First Israel Fund, a closedend equity fund investing primarily
in Israeli securities. The fund was established in late 1992, it peaked in
early 1994, and it then sold off
strongly into early 1995 at $9 a
share, its all-time-low price. Multiply
the low price times 1.382, and you
get 12.438. Note how many times
later in 199512.438 held on a
weekly closing basis. In fact, the
highest subsequent close for all of
1995 was 12.625a mere 0.187
point more than the 138.2 percent
retracement level. Furthermore,
161.8 percent of 9 equals 14.562,
which, if you were to look into 1997,
was slightly less than half a point
from the first quarters high of 15
(figure 4).

FIGURE 3. Type MER <Equity> GPO D <Go>. Use the high price from July 13, 1998,
for your absolute retracement reference point

FIGURE 4. Type ISL <Equity> GPO W <Go>. Notice how the price of the First Israel Fund
stalled at retracement levels of 12.438 in mid-1995 and 14.562 in 1997

Maybe youre a believer in measurement of market movement; maybe

youre not. But regardless of which
way you lean, you should have little
doubt that, in fact, Fibonacci numbers work in mysterious ways.
Any comments? Type MAGAZINE
<Message>. For printouts, type
MAGZ <Go>.

Rick Bensignor is an applications

specialist for Bloomberg in New York
Bloomberg June 1999 93