Since Wednesday was PI day (3.14), I thought I might update my PI trade article, says Dave Landry, f...
Predicting Price Targets with Fibonacci
01/26/2012 4:35 pm EST
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.”
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.”
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.
From the below monthly chart of the SPDR Gold Trust (GLD) we can develop some additional targets for this popular ETF. Using the most recent rally from the 2008 low (point a) to the September high (point b), the 100% target (in black) from the December 2008 low is at $268.12.
Let’s review this calculation: the 2008 low was at $66 and the 2011 high was at $185.85. This difference of $119.85 is added to the December 2011 low of $148.27 to give a projection of $268.12.
The other way to derive price targets in either an uptrend or a downtrend is to use the corrective periods within the major trend. These continuation patterns can then be analyzed using Fibonacci analysis to generate upside or downside targets, as I discussed in a lesson entitled “Using Fibonacci to Trade Flag Patterns.”
I find this to be a very valuable approach that I often use in my Charts in Play column to determine an initial profit level from the daily charts. When used on quarterly or monthly charts, it can be useful in determining a longer-term strategy.
For example, in the monthly chart of GLD we can use the September 2011 high of $185.85 (point b) and the December 2011 low at $148.27 (point c). The strong recent price action suggests that this low is significant. The 127.2% retracement target from this rally is at $196.
This value is obtained by taking the difference from point b to point c ($185.85-$148.27, or $37.58) and multiplying it by 1.272. This gives $47.80, which is added to the low at point c ($47.80 + $148.27 = $196.07). This is the next likely upside target for GLD in 2012. The 261.8% target is at $223.43. The monthly OBV continues to signal higher prices.
Similar analysis can be done using the continuous contract of the crude oil futures. This monthly chart goes back to late 1999. Using the rally from the 2001 low at $17.17 (point a) and the 2006 rally high of $78.40 (point b), we were able to derive some very interesting targets that were hit in 2008.
The 100% level, or equality target, as measured from the 2006 low of $49.90, was at $111.18. This was reached in March 2008. The 161.8% target of $149 was almost reached in July 2008 when crude oil rose to $142.13. Using the same price action, the 261.8% target is at $210.33.
The rally from the 2006 low (point c) to the 2008 high (point d) now gives us an equality target (100%) at $130.57, as calculated from the early-2009 low of $33.20 (point e). The 161.8% target stands at $190.74 (in red).
Crude oil had a sharp correction in 2011 from the high at $114.83 (point f) to the October 4 low of $76.25 (point g). This can be used to calculate the 127.2% retracement target at $127.32. The 161.8% target is at $138.70.
Given the fact that we’re entering a seasonal strong period for crude oil, there are a series of targets ranging first from the 2011 high at $114.83, and followed by $127.32, $130.57, and $138.70. These are the levels to watch in 2012.
The strong action in the US stock market this week suggests that the Spyder Trust (SPY) could close January at new five-month high. The monthly chart shows that while we exceeded the 61.8% retracement resistance from the 2007 high (point b) to the 2009 low (point c), we are still below the 78.6% retracement resistance at $138.26.
Using the rally from the 2002 low (point a) to the 2007 high (point b), the equality target from the 2009 low is at $147.55. We can also calculate the retracement resistance targets using the decline from point b to point c. The 127.2% retracement target is at $182.70.
Nearby targets can be determined using the decline from the early-2011 high at point d ($137.18) to the 2011 low at point e ($107.43). The 127.2% retracement target (in blue) is at $145.27, while the 161.8% target is at $155.65.
Clearly, the first major hurdle for SPY is the 2011 high at $137.18, and if that level and the 78.6% retracement resistance at $138.26 are exceeded, then the next major target is at $145.27.
The Powershares QQQ Trust (QQQ), which tracks the Nasdaq 100, is the only of the primary market averages that has exceeded its 2007 high. It is on track to put in a very strong performance in January.
Of course, we must remember that in March 2000, QQQ hit a high of $119.47 (point a), and it needs to move above the $70 level to overcome the 50% Fibonacci retracement resistance from the 2000 high to the 2002 low, point b. The 61.8% resistance level is at $81.70.
Looking at the rally from the 2002 low at $19.58 (point b) to the 2007 high at $55.07 (point c) and measuring up from the 2009 low of $25.05, the equality target is at $60.54. This level was exceeded the same week this lesson was published (Jan. 26, 2012). The 161.8% projection target (in red) is at $82.47.
Additional upside targets can be calculated using the rally from point d to point e and measuring up form the 2010 low (point f). This gives you an equality target (100%, in blue) at $67.15 and a 161.8% target at $82.97.
Though additional targets can also be derived, I find the cluster of upside target in the $81.70-$82.47 area quite interesting. Before they become really relevant from an investing standpoint, however, the 50% retracement resistance level at $70 has to be overcome. That is about 15% above current levels.
Given the stellar recent earnings report from Apple Inc. (AAPL), I thought it would be interesting to take a long-term Fibonacci view of this stock. AAPL made a low in the fourth quarter of 2000 at $6.81 (point a).
Using the rally from this low to the 2007 high at $202.96 (point b) we can derive some interesting upside targets. The 100% target (in black) from the early-2009 low at $78.20 was at $274.35. APPL peaked in April 2010 at $272.46 before correcting below $200 the following month. The 161.8% target at $395.57 was exceeded in July 2011.
The retracement targets can also be calculated using the decline from the 2007 high (point b) to the 2009 low (point c). The 127.2% target (in red) was at $236.90, while the 261.8% target was at $280.06, which coincided nicely with the equality target at $274.35.
For those Apple superbulls, the 261.8% projection target is at $591.72 with the 423.6% retracement target at $606.68. Though these targets may seem pretty crazy now, the long-term technical action is positive. The quarterly on-balance volume (OBV) started an uptrend in 1998 and has since made a clear pattern of higher highs. It still looks very strong and is likely to make another new high this quarter.
In this lesson, I concentrated on the longer-term charts to emphasize the power of the technique. Of course, the same techniques can be applied to weekly, daily, or even hourly data, but as you shorten the time frame, the margin for error becomes higher.
For those of you who want to apply this analysis on your own, I would recommend you take the time to analyze some monthly charts that have pronounced uptrends and/or downtrends. First, do some hindsight analysis, but then also make note of your future price projections and keep track of them to see how well they worked.
I will continue to point out the Fibonacci targets in my daily Charts in Play column, which should give you another way to judge whether this technique may be useful in your trading and investing.
Though I have been developing my approach to Fibonacci analysis for many years, my old friend and veteran Fibonacci expert Joe DiNapoli helped me get started. I always found his methods to be very interesting, and for those of you who would like to learn from a real expert, I would recommend his book, Trading with DiNapoli Levels: The Practical Application of Fibonacci Analysis to Investment Markets.
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