CHARTING
Using The Natural Order
Projected Fibonacci Targets
by Mohab Nabil
Here's a new technique for determining price targets after a breakout
from a previous price swing.
Fibonacci analysis, which is employed by
practitioners of various sciences such as astronomy, mathematics, and architecture,
also has a role in projecting price targets of financial securities. After
working with Fibonacci ratios for several years, I developed a new technique
for determining price targets after a breakout (up or down) from previous
price swings, which I call projected Fibonacci targets (PFT).
THE BASICS
Before applying the PFT, it is important to understand that broken support
levels often become resistance levels during subsequent rallies, especially
if a broken support level coincides with a Fibonacci retracement level.
Figure 1: CLASSIC EXAMPLE OF A DOWNTREND. Once a support level is
broken, it acts as a resistance level.
Figure 1 shows a hypothetical example of a price downswing from point
A to point B, followed by a consolidation area, and finally a breakdown
to point C (a classic example of a downtrend). The broken support level
established during the consolidation now acts as resistance for the subsequent
rally. The resistance at $60 also represents a 50% retracement of the move
from A to C ($100 to $20).
Figure 2, the chart of Xilinx, Inc. (XLNX), from October 4, 2001, to
November 2001 shows a downswing from point A to point B. The trend halted
temporarily and formed a consolidation area with support at around $58.
After breaking below $58, the new downswing reached a low of $35. Prices
then rallied from this low back to $58 - an important level, because it
was the support level of the previous consolidation. It has now reversed
its role and is acting as resistance. The move from $35 to $58 is approximately
a 38.2% retracement of the move from $92 to $35 ($92 - $35 = $57 * 0.382
= $21.77 + $35 = $56.77).
This example reveals that when a resistance level (or a support level)
is formed by breaking previous support (or breaking previous resistance),
it often coincides with a Fibonacci ratio (of 23.6%, 38.2%, 50%, or 61.8%)
of the whole move, resulting in a resistance (or support) level that is
not easily breached.
...Continued in the May 2002 issue of Technical Analysis of STOCKS
& COMMODITIES
Excerpted from an article originally published in the May 2002 issue
of Technical Analysis of STOCKS & COMMODITIES magazine. All rights
reserved. © Copyright 2002, Technical Analysis, Inc.
