Candlesticks, Fibonacci, and Chart Pattern Trading Tools : a synergistic Strategy to Enhance Profits and Reduce Risk

Figure 5.21
Slope of PHI-ellipses upward in relation to correction levels.
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WORKING WITH PHI-ELLIPSES ON DAILY DATA
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The second possibility is that the correction wave 2 goes below (or
above) the starting point of wave 1 in an uptrend (or downtrend). In
this case, the slope of a PHI-ellipse could turn out very small. As shown
in Figure 5.22, a small PHI-ellipse slope indicates a sideward market.
PHI-ellipses work on monthly, weekly, and daily charts; and
those are the data compression rates on which we have conducted our
analysis. When it comes to intraday charts, PHI-ellipses will also
work on hourly charts. However, to avoid complicating the analysis at
this point, we defer the description of intraday samples until later in
this chapter.
The length of the correction in wave 2 after the first impulse wave
often determines the length of a PHI-ellipse. We cannot know in ad-
vance how long the formation of wave 2 will last, however, so we do not
recommend trading if the formation of a PHI-ellipse is in progress.
Wave 3, as the second impulse wave in our count, must be at least
as long as the f irst impulse wave. Therefore, we have to adjust the
width of PHI-ellipses on multiple sideward patterns (see Figure 5.23).
Figure 5.22
Slope of a PHI-ellipse as an indicator of a sideward market.
Figure 5.23
Adjustment of PHI-ellipses based on the duration of corrections.
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134
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PHI-ELLIPSES
We now focus our analysis on sets of daily charts of the Japa-
nese Yen cash currency and the S&P 500 Index. As mentioned, we have
selected these products for their public interest, volatility, and liquid-
ity; and because they especially represent investors’ behavior, which is
the underlying maxim of Fibonacci analysis. In principle, of course,
PHI-ellipses can be applied to every product traded.
We rely on only an 8-month time span for each of the two prod-
ucts, and during that time not one PHI-ellipse is like the other. This
is similar to the work we have done with extensions and corrections.
Even though we apply the ratio 1.618 to different price moves, the
size of every price move results in the precalculation of different
price targets. The same result occurs when we work with PHI-
ellipses. We do not analyze a single swing pattern, but rather, a com-
plete set of swings—smaller ones and bigger ones. Therefore, a major
PHI-ellipse will circumvent the complete (and much bigger) price
pattern with sometimes many or sometimes very few smaller price
patterns in between.
PHI-ellipses have their roots in the Fibonacci ratio PHI and
the ratios from the PHI series. We can combine PHI-ellipses with
other Fibonacci tools, such as the Fibonacci summation series,
extensions, and corrections. Doing so gives us an early indication
where a PHI-ellipse might end. Because PHI-ellipses develop over
time, the combination of Fibonacci tools is helpful to conf irm multi-
ple PHI-ellipses in progress. Based on the knowledge we accumu-
lated from the analysis of extensions using the Fibonacci ratio 1.618,
we can precalculate a price target from the amplitude of the f irst im-
pulse wave inside the PHI-ellipse. Independent of any future mar-
ket move patterns, we can then assume that if the market price ever
reaches the precalculated price target, it might also mean the end of
the progressing PHI-ellipse in price and time.