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

Figure 6.17
S&P 500 chart from 05–02 to 11–02. Resistance areas based on
Fibonacci extensions and corrections.
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CANDLESTICKS, CHART PATTERNS, AND FIBONACCI TOOLS
2. The second resistance area is between 1,022.00 and 1,038.00
points. This price band is calculated based on the Fibonacci cor-
rection level 61.8 percent (points A to B), an extension at a ratio
0.382 (valley in B to peak in C), and a second price extension at
a ratio 0.618 (valley in D to peak in E).
3. A third resistance level shows up at about 1,085.00 points. This
can hardly be called an area, because two extensions, one calcu-
lated at a ratio 0.618 on the swing from B to C, and one calculated
at a ratio 1.000 on the swing from D to E both lead to almost the
same target price in the S&P 500 Index.
It is important to realize that Fibonacci extensions and correc-
tions point at trend reversals in price, not in time. An experience we
had with one of our projections for the S&P 500 Index illustrates the
importance of time as a trading factor.
A True Story
In the investment magazine, 
Hedge Funds Review, 13,
October 2001
(p. 18), we published an article under the working title “How Far Will
the S&P 500 Index Drop?”
Our calculated target price was between 750.00 and 800.00
points. We were on the dollar with our calculation pricewise, but we
did not expect the S&P 500 Index f irst to go up and then reach our
price target. We described as well how we would get a buy signal based
on a PHI-ellipse should the market price not go lower but climb higher
instead.
This example ref lects real life and shows exactly the dilemma
while working with Fibonacci price targets: Calculations might be cor-
rect, but timing may be off. Nothing in this universe can calculate
trend changes in price and time correctly all the time. But Fibonacci
calculations have an astonishing rate of accurate forecasting in
price—if the time factor is brief ly faded out.