The One Minute Millionaire Diamond Mine
 The Wealth Factor
 Stock Market Strategies
 By Dr. Stephen Cooper
     
 
 

What Goes Down Must Come up

The stock market, and more particularly, individual charts, often show an astounding degree of symmetry. As with nature itself, patterns emerge from seeming chaos for those who care to look for them. Chart analysis is by definition a study of patterns of price and volume, though so many of its students are unaware of this primary tenant.

If you do indeed look for these patterns, it certainly won’t take long to find them. I have my charting software set up to show me a chart of the Dow Jones Industrial Average first as I open the program. As my program opened this morning, an example of what I am going to teach you was right there for the viewing.


Dow Jones Industrial Average

Notice that in the area circled in red, something of a mirror image is apparent. After price had dropped from the 9000 point range, it turned right around and ascended back to the 9000 range. Interestingly, these price gymnastics were accomplished in about the same time spans. That is, the time it took for prices to drop was about the same time it took for them to return to their former heights.


A Journey into the Esoteric

At the risk of putting you off, I must introduce you to a fascinating tool that demonstrates what I’ve been telling you about. Now, don’t get caught up in the detail. Just take in the big picture here.

This tool is called the Fibonacci Retracement. It is based, mathematically, on number sequences that were first described by an Italian mathematician, Leonardo Fibonacci, in about 1200. Fibonacci numbers are a sequence of numbers in which each successive number is the sum of the two previous numbers:

1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, etc.

This numerical pattern has been applied to the study of price charts with the tool I mentioned, the Fibonacci Retracement.

Below, I’ve added a Fibonacci Retracement to the same chart and time period we looked at above.


Dow Jones Industrial Average

Notice the percentages listed to the left of each horizontal reference line. They run from zero % at the bottom to 100% at the top. After prices fall and then begin turning back up, we can apply the Fibonacci Retracement to a chart. We then can watch as prices retrace their previous drop. This Retracement is viewed as a percentage.

The Money Making Part

What we find, as we use the Fibonacci Retracement, is that prices tend to retrace to the percentages based on the Fibonacci sequence. That means that, as price approaches 23.6%, 28.2%, 50%, 61.8% and 100%, we look for the price retracement to end. In trading, perhaps, the most challenging task is to know when to take profit; this is where the Fibonacci Retracement tool comes in. If price rebounds to the 50% line, for example, and then begins to retreat, we have a signal to take profit. If, as is seen on this chart, price moves up past the 50% line, we then look to the 61.8% reference line as a possible profit-taking point. If this one is broken, we then look toward the 100% line.

Notice that price moved to the 100% retracement line and then failed. This is nearly the exact price point as was seen at the beginning of the price drop that preceded the retracement! In fact, the closing price on the day before the major drop, and the 100% retracement price, are within 10 points of each other! This is in an index trading at 9000 points, making the difference only about .001%.


Real Life

If this is new to you, I don’t expect you to run out and start drawing Fibonacci Retracement studies on charts this afternoon. You’ll need a bit more background. Though these indicators can be figured by hand, having the right software makes it far easier. The particulars of how to use this tool are detailed in the Windows to Wealth series or in the Advanced Technical Analysis course that I periodically teach for Enlightened Millionaire Institute members.

The point here is that Stock Market price changes often unfold in identifiable patterns that appear over and over again. Because of this, we can clearly take advantage of this phenomenon for profit.

   
 

As a trader, teacher, author and lecturer Dr. Stephen Cooper has guided thousands of students to greater success in trading stocks and options. His site, www.OnlineOption.com. is an excellent resource for traders of all levels. A free newsletter is available by going to OnlineOption.com. Over the past five years Dr. Cooper has conducted live teleconference courses covering personal financial basics, stock screening, technical analysis and practical trading. He has authored The Online Option Trader, Windows to Wealth, and The Truth About Money. With over 18 years of experience Dr. Cooper is recognized for his successful techniques, his clear and systematic teaching style, and technical expertise.