STRATEGIES

Beyond identifying key support and resistance levels, Fibonacci analysis can also help traders and investors project future price levels across all markets and time frames.

My 2010 lesson entitled “Fibonacci Analysis: Master the Basics” focused primarily on how to use Fibonacci analysis to identify support and resistance levels, which can then be used to define not only buy or sell levels, but also stop placement.

The other main role Fibonacci analysis plays in my trading and investing is in determining price projection targets that can be helpful in closing out existing positions or establishing new ones.

The first method for determining price projections is to identify a previous primary trend. In the gold market, this was the 1976 low of $101 and the 1980 high of $873. Using the next major low, which for gold occurred in 1999 at $253.20, your first target is derived by calculating the length of the rally ($873-$101) and adding it to the low of $253.20.

The derived price level of ($772 + $253.20) $1025.20 is the 100% level, or equality target, and was exceeded at the end of March 2008.

This analysis was last discussed in the January 2010 article “Fibonacci Analysis of the Metals,” in which I commented, “Just a year ago with gold trading at $895, I discussed the Fibonacci targets for gold, which at the time were at $1130 and $1252. Now that gold has surpassed the $1200 level and corrected fairly sharply, I wanted to review what I see as the key levels to watch in the metals.”

Figure 1

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In that article, I further reviewed the history of gold since the 1980 high, which remains relevant even today. I noted that “using the 1976-1980 rally, the 61.8% target was at $732, which marked the high in 2006. The 100% projection was at $1025, which was slightly exceeded in 2008 when the high was $1034. The 161.8% projection target is at $1500.”

Figure 2

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The current quarterly chart of the Comex gold futures shows that the 161.8% projection target at $1502 was exceeded in May 2011. This target was calculated by taking the length of the last major rally ($873-$101, or $772) and multiplying it by 1.618, which gives $1249. This is then added to the low of $253.20 (point C) to give $1502.26.

The gold futures hit a high of $1577.40 on May 3 before beginning a two-month correction. The next upside target at $2274 is the 261.8% projection using the 1976-1980 rally.

Additional targets can also be calculated using the rally from point C to the 2008 high at $1033.90 (point D). The equality target, or 100% measure from the late-2008 low of $681 gives us a target at $1452. This target was exceeded in early-April 2011 prior to gold’s May 3, 2011 high.

The 161.8% target measured using the same rally ($253.20 to $1033) gave a target of $1942, which was almost reached in September 2011 when gold made a high of $1923.70. Once the $1942 level is exceeded, the next major target is $2274.

NEXT: Calculating Price Targets for Popular Gold ETF GLD

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