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Monday, October 28, 2013

FIGURE 8.10

Part 2

FIGURE 8.10
Five-month cycles in S&P 500 index.
(
Source:
FutureSource.
Reprinted with permission.)

This market had many good clues for a potential bottom to occur. How-
ever, keep in mind that picking bottoms can be hazardous to your wealth.
This information might have at least kept you from selling short in the hole.
When looking for a cycle occurrence—in other words, a repetitive
pattern—go back to historical price moves. This research may prove to be
enlightening for your trading. Here is an example taken from an article that
was e-mailed to clients and posted on my web site on Tuesday, July 23,
2002, the day before the Dow made a bottom at 7450 and the S&P 500 index
low was 771.30.
The seven worst months for the S&P 500 since the inception of stock
index futures in 1982 were, in calendar order:
1. October 1987, 152 points
2. October 1997, 148 points
3. August 1998, 175 points

This is part- 1

Thirteenth-century Italian mathematician Leonardo Fibonacci concluded
that a number sequence reflected human nature and that patterns repeated
themselves in a certain order. The
Fibonacci series,
as it is called, is an in-
finite series of numbers that adds each number to the previous number such
that 1 + 1 = 2, 2 + 1 = 3, 3 + 2 = 5, 5 + 3 = 8, and so on to get a number se-
quence of 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144,
....
These numbers are used
to help cycle analysts time market turns and lengths of price moves. Major
tops or bottoms are often calculated by starting with the event of a high or
low and then calculating out in time and price increments that correspond
to the Fibonacci series.
Fibonacci’s work can be applied to trading in various ways. You can look
at time cycles, searching for a coincidence of a reoccurring pattern that de-
velops on a historic basis such as every 21, 34, 55, or 144 days or perhaps 3,
13, 21, 34, . . . weeks. If you do a little math, you will see that the numbers,
other than the first few smaller ones, all have the same consistent ratio to
each other. These ratios—0.382, 0.50, 0.618, 0.768, 1.00—show up often in
analysts’ research as price retracement levels, wave lengths, time projec-
tions, and in other ways. For example, you can take the distance in time
from price peak to peak and then apply these ratios to help predict the tim-
ing of the next potential peak or smaller or larger peaks.
Figure 8.10, the S&P 500 futures chart, shows a five-month cycle count.
Not only did the low on July 24, 2002, fall on the five-month number but also
on the day of a full moon. The significance of the five-month cycle is that it
is a Fibonacci series number and is approximately 100 trading days, which
is a Fibonacci ratio figure and the length of a moving average that many
traders watch. Not all of the lows on the chart are monumental lows, but
more times than not they are distinctive lows. Pivot point analysis pinpointed
the R2 target weekly low for the July low at 781.67, close to the actual figure