Fibonacci time as well as price projections can help identify probable market bottom

Fibonacci may be telling us that an important market low is nigh; and, if that proves out, might also point to the next swing high time frame too. Many savvy investors and traders are aware that Fibonacci numbers play a significant role in market prices. The reasons why Fibonacci numbers "work" are beyond the scope of my post, so anyone curious about that should conduct some research to find the various studies documenting how, and the theories about why, Fibonacci numbers are so useful. What many investors and traders may not realize is that they work not only in terms of price, but also in terms of time. A quick internet search shows that many have written on this topic, and I will just quote from one of these. (Please note, I am quoting simply to illustrate the concept - I am not familiar with this source and do not have any opinion at all regarding this company - so I am not referring anyone there, I am simply quoting from their very nice study paper on the topic.) So, the reason why I'm bring up the topic, is that we are now in a time band that encompasses the Fibonacci 1.382 time extension from the market highs of October 2007 - so this time band has probability for establishing a market low point.

Also note - I am not saying it provides a market reversal for "the" market low for all times into the future! I am just saying this time period can see a very significant market low point. The 1.382 time extension from October 11, 2007 points to February 28-March 1. In the Nasdaq, the 1.382 time extension from October 31 points to March 19-20. (For what it's worth which may be nothing, I had been thinking of October 17, 2008 which points to March 5-6 - probably because that time frame in October seems to capture the range of time when markets were peaking in October 2007). I am reluctant to pinpoint an exact date, if only because the different markets may have had different exact dates when they reached their highest point. So I am more comfortable with stating that the current time frame we are in, is a Fibonacci 1.382 time band representing a high-probability reversal time zone for a significant market low.

This Fibonacci time concept is used by many investors and traders, including a number of large institutional technical traders (whether they say it publicly or not - but the first I learned of it was from Kevin Haggerty, a long-time successful trader who spent many years with well-known funds). And there are various articles written about it. The paper I'll quote from that presents these concepts succinctly, is Fibonacci Studies with mGlider and it's on the internet at http://www.mglider.com/fibonacci_studies.doc. Here are some of the important points:

Fibonacci time projection days are days on which a price event is supposed to occur. Time projection analysis is not lagging but is of forecasting value. Trades can be entered or exited at the price change rather then after the fact. The concept is dynamic. The distance between two turning points is seldom the same, and time projection days vary, depending on larger or smaller swing sizes of the market price pattern. This base for drawing this shape is 2 critical points: two highs, two lows or a low and a high. Fibonacci levels are projected into the future based on those points and at this time it is impossible to say whether those levels mark peaks or valleys. If price is declining or rising approaching a given Time Projection level, it is likely this level will mark an end or a pause of a particular trend. It is always recommended to combine Time Projection with other Fibonacci tools for more dependable signals.

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Fibonacci spirals provide the optimal link between price and time analysis and are the answer to a long search for a solution to forecasting both time and price. Each point on a spiral manifests an optimal combination of price and time. Corrections and trend changes occur at all those prominent points where the Fibonacci spiral is touched on its growth path through price and time.

You will be astonished to see that if the correct center is chosen, Fibonacci spirals pinpoint turning points in the market with an accuracy seldom before seen. Investing based on spirals is neither a black-box approach nor an overfitted computerized trading system. It is a simple universal geometrical law applied to different sorts of products such as futures, stock index futures, stocks or cash currencies.

Folks, I put a bold emphasis onto the words, "if the correct center is chosen" for the Fibonacci spirals. My experience with both time and price projections with Fibonacci analysis is that it can be difficult to choose the exact correct point - whether it's a high or low for price/time, or a correct center for the spirals (sometimes called Fibonacci arcs). So I like the approach, but I don't have time to sweat the details of it day in, day out. Still - it is obvious that on the monthly charts, we can have confidence about the significance of the October 2007 market peak, and therefore the Fibonacci projections from it.

Also, as a reminder just so you know, I did not get this idea from the source that wrote this paper, and I don't know anything about that company. Where I first learned about Fibonacci time zones was Kevin Haggerty, a successful trader I followed for some time at TradingMarkets.com; and I learned more about them from Dom, my late and best trading mentor (who operated the TradingtheCharts.com site that closed following his demise in October 2008 - yes, a Fibonacci one (1) year after the market peak).

What if this 1.382 Fibonacci time band proves out for a market low in this time frame - what's the next significant time frame that could be the next market swing high point? Well, the 1.618 Fibonacci time extension is also an important one, and that falls about the end of May or a time band approximately mid-May to early or mid-June, 2009. Now, I don't want to be misunderstood - this is an important Fibonacci number, but it is also possible that such a time frame around late May could be the next market low, if this current time frame doesn't contain the downtrend for now. So, the time around the end of May could be an important market high or low. At the moment, I am tilting to the idea that we see an important low in the current time band, and the end-of-May time band being an important high - partly for the reasons I discussed in the post yesterday about the Armstrong business confidence cycle model, and also because the Bradley cycle could point to the same time frame (use the "Cycles on Bradley" label to look up my prior posts showing the 2009 Bradley projections). And, well, it just "looks" to me like it can make sense from an Elliott Wave perspective, and on my weekly and monthly charts of the S&P 500 and Dow Jones Industrial Average too.

In fact, if this starts working out, we can start thinking of the right level for a market swing high in that time frame, and I've got two ideas on that. One of course will be to look to Fibonacci price retrace levels back up (and I'll want to include the retrace levels to 1440, not just to the October 2007 peak, since the 1440 swing high was very significant for several reasons). Another will be moving averages, such as the simple 200-month moving average. It will be quite interesting if we also see that time and price zone being about when the 50-month moving average tests down to the 200-month moving average - that confluence of moving averages also tends to be a time when price makes a good effort to return back toward that confluence price level. Offhand, I would look for numbers in the range of 860, and particularly 960, and possibly 1060, but we'll fine-tune these once we see confirmation of a swing low being put in that can help with the price levels for the calculations.

So, don't forget that where we go in the short-term here can be very much influenced by the big-picture charts. We'll continue to put up the standard analyses and comments this weekend, of course - I just want to be sure that we see all this in the context of where we are right now in this big picture.