Discussing the Dreaded Fibonacci Retracement

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Hey look at that. The S&P 500 is back over 1,000 after stocks in New York rallied on a Federal Reserve statement that the economy was “leveling out,” whatever that means. We left you in yesterday’s Daily Reckoning with a promise to discuss the dreaded ‘Fibonacci Retracement’ on the S&P that could portend a correction.

So let’s do that! And actually, it’s not inherently dreadful. Our Swarm trading technician Gabriel Andre uses the Fibonacci numbers to track trends in commodities, currencies, and stocks.

In fact, he’s been muttering to himself in French the last week that September may be a very good month for short sellers. He bases this on the Fibonacci numbers and the fact that futures traders are predicting a spike in the volatility index (VIX).

For the record, the S&P completed a 38.2% rally from its fall after the 2007 low. The Fibonacci numbers can be calculated for any two points. In this case, you take the high in October 2007 and the low in March and then graft the Fibonacci numbers on to the move. After a brief consultation this morning, we asked Gabriel if he could generate a chart showing the move.

S&P 500 completes 38.2% retracement

Gabriel retreated to his Swarm lair and quickly conjured up the chart above. You can see the 38.2% level. And you can see that the index has rallied by 49% from the March closing low of 676l – which itself was actually a 12-year low. The rally left the index trading at about 18.6 times the aggregate earnings of the companies that make up the index. That valuation, according to Bloomberg, was the most expensive valuation since 2005.

Technicians – for better or worse – pay no heed to the fundamentals. With so much program trading on the indices (computers buying and selling shares based on pre-determined trading patterns) this makes technically driven systems somewhat self-fulfilling. Because everyone is using the same price triggers, the system generates the very movements it predicts.

“Yes indeed,” Gabriel added cryptically. “38.2% retracement level reached after the price action found some support on the 23.6% on July 10. A correction expected now. If it breaks above then the next target is 1,120 points, the 50% level.”

Though we find the language of the technicians largely incomprehensible, it seems to work for them; especially because on most days 50% of the trading on indices in New York is program trading. But it’s not New York we’re really interested in anyway. What we’re interested in is whether a market-neutral trading method can actually boost the returns of a buy-and-hold strategy on blue-chip stocks.

Gabriel has been back-testing a technical system on S&P ASX/200 stocks. We’re trying to see if there are certain large-cap stocks that trade in channels. It presumes that more active management of your large-cap portfolio is more profitable than a buy-and-hold strategy. That’s presumptuous, given that you rack up transactions and taxes every time you make a trade.

But so far, the results are intriguing. We’ll keep you posted. The motive for pursuing the system is that in a market with volatile money flows and undergirded with a constant level of uncertainty about earnings and the economy, you’re going to see a lot of big and hopefully tradeable moves in large stocks.

Mind you, it doesn’t look like these moves are the typical fast, one or two day moves you get in small cap stocks (the ones Gabriel tracks in the Swarm Trader). But what we’re seeing so far is that double-digit moves in large-caps are frequent and tradeable, if not entirely predictable. Stay tuned.

Dan Denning
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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Comments

  1. A-ha! A system for easy money you say?

    Of course you don’t really mean that. Or do you? No, of course not. Actually, I am intrigued by this idea. I do believe that there is some predictability of the flight to Blue Chips by panicked traders. But just how predictable is the environment they are traded in?

    The stock market sure did seem predictable before Oct 2008 didn’t it. And house prices doubled every 7 years.

    However perhaps the only things we can be certain about now is how much the Gov’s of the world will screw things up. And how poorly our tax system is designed. And how greedy people will not be converted to saintly giving types without a fight.

    But I am still interested to hear what you have to say.

    Reply
  2. “And how greedy people will not be converted to saintly giving types without a fight.” Pete, 13/8/09
    Amusing comment from one who lost 40% in the UK property crash and wishes the same on others in Oz, Pete. There’s no sinner like a reformed one, eh?! ;)

    The good news is that the eastern provinces of Canada appear unaffected by the GFC. Tourism is full-on, shoppers enthusiastic, restaurants not only full, but the queues are a nuisance. (We cannot begin to understand how les Quebecois manage to stand for hours, in interminable queues, no matter how good the show is… or the food is… . Encroyable!)

    House prices? There are a few bargains between $390 – $500 K, but over 90% don’t even have a carport. We’ve seen just two houses with a double garage… . Most people seem to drive the very latest vehicles and it’s interesting to see countless expensive cars perched in front yards and streets at night. But housing does seem ‘affordable’ here… . A thick realty brochure gave us a glimpse of the housing situation across greater Quebec. Realty seems a lot more buoyant than we’d expected in this province.

    Stimulus projects appear to all be infrastructure-related. Roadworks across Quebec are virtually non-stop.
    Saint Jean Detour must be the patron saint of roadmakers here. (Are the ‘saintly giving types’ in federal government responsible for our extra kilometres?)

    Thus far, we’ve met just one individual who has been adversely affected by the GFC… a gent from Chicago who had lost his job. He’s in his seventies, but had managed to quickly find another, in a hardware shop.
    Like Australia, Canada seems well-placed to avoid the much-predicted depression. Provincial governments appear to have quickly taken advantage of increased federal funding for overdue bridge and road repair. Wonder if this is happening to the same extent in the US, or if most is (still) disappearing into corporation bailouts…?

    Biker Pete, Quebec City
    August 13, 2009
    Reply
  3. I do think people tend to kid themselves a bit over the rate at which house prices go up. They forget little things like the money they’ve put in out of their own pocket in renos ($20 b pa in Oz if I recall one estimate correctly) and they probably aren’t counting their own labour in at $20 per hour (or more) either.

    But that aside, there is no denying residential RE has been an exceptional investment in Qld at least for many, many, many years. I can trace it back to about 1957 when my dad first dabled (CQ and later Brisbane.) And it has pretty much been a one way street through good times and the not so good. 50 years is a long time.

    And in all fairness, I know of properties that have done better than doubled twice over the last 14 years. Plus ones that haven’t done nearly as well of course. But as an investor it really is up to a person to sniff out the properties they reckon will outperform.

    I did know a bloke once who managed to make a capital loss on residential RE – He bought a house in a one horse mining town and the mine closed down. But it is unusual.

    A comment from a FHB I picked up off a “house prices could go down” blog: FHB reckoned a 10% drop wouldn’t worry her because that was just the money the government gave her. Although she would certainly be a bit disturbed if they dropped by more than that – Indignant even was my take? (Interesting how the other half think – Smile.)

    I see your mum’s point re not wanting to be in cash Pete. While having my income munched by the RBA over the last 9 months to support all the people who are in debt may have helped me feel extremely saintly, it hasn’t recommended itself to me as a long term way of life. (Smile again!)

    Reply
  4. How did this turn into a real estate oriented discussion? I mentioned it in passing and here we go again.

    Biker, I continually find it comical how you have made assumptions that I have been burned by real estate in the past. Not quite sure where you ‘think’ you heard that from, but to me it does say a lot about what you are about.

    My greedy comment was not intended to be interpreted quite the way that you did. But again, that is a reflection on you. My intention was simply to point out that investors(?) who have been enjoying booms or taking advantage of bubbles are unlikely to want things to change. In fact, when it comes to company executives (and their salaries) and their influence on politics and markets, the greed always comes before social or moral responsibility. And that is something that we can be fairly certain will not change in a hurry.

    Reply
  5. Pete – FYI: On 4 July 2009 under the article The Rule of 72 vs. Housing someone called “Pete” commented (amongst other things) “We are currently in the midst of the biggest bubble since tulip bulbs and a massive correction is due. I personally lost 40% on a property in the 90’s in the UK, and it’s happening again.” http://www.dailyreckoning.com.au/the-rule-of-72-vs-housing/2009/06/16/

    Reply
  6. Pete.
    Don’t concern yourself with Biker Pete.

    Can you not see that he is a parody?

    No one out there is ignorant and narrow minded enough to really be the way that Biker Pete comes across.

    I love the fact that he considers himself an expert on everything and everywhere even after visiting on a holiday. I also find much amusement in his assessment of places he visits viewed through his ignorant and narrow minded australian view of the world. And you thought americans were ignorant!? Ha !

    You have to laugh…. he is very funny and doing a splendid comical job.

    Keep it up Biker Pete!

    Reply
  7. Pete, there may well be another person posting under the same alias as yourself if the comment highlighted by Ned S above is not yours. If so that would really confuse things.

    Reply
  8. Ha, ha… Not really my intention to bait the Property Bears, but it’s hard to resist…! Pete has gone religious on us. Plans to donate his uteload of bullion to charity! :) Prozak? His tag tells it all. ;) Since the P Bears are looking for cheap property, I’ll keep posting my tips, fellas.

    Bill Bonner draws precisely the same kind of conclusions about the global economy while flying around the world… and I’ve always appreciated his interpretations of market forces at work in the hotels, streets and alleys of whichever city he’s visiting. You can look forward to _years_ of it, P Bears!~

    “And house prices doubled every 7 years.” Pete, 13/08/09

    In fact many of our property investments more than doubled those returns, Pete. But, as Bill has stated on numerous occasions, the real trick isn’t simply making money… it’s keeping it. Probably time he revisited that theme… for those of very limited comprehension… .

    Biker Pete, St. Simeon, Quebec
    August 14, 2009
    Reply
  9. Pete – FYI: On 4 July 2009 under the article The Rule of 72 vs. Housing someone called “Pete” commented (amongst other things) “We are currently in the midst of the biggest bubble since tulip bulbs and a massive correction is due. I personally lost 40% on a property in the 90’s in the UK, and it’s happening again.” http://www.dailyreckoning.com.au/the-rule-of-72-vs-housing/2009/06/16

    Reply
  10. Pete – FYI: On 4 July 2009 under the article The Rule of 72 vs. Housing someone called “Pete” commented (amongst other things) “We are currently in the midst of the biggest bubble since tulip bulbs and a massive correction is due. I personally lost 40% on a property in the 90’s in the UK, and it’s happening again.” http://www.dailyreckoning.com.au/the-rule-of-72-vs-housing/2009/06/16/

    (FHB)

    Reply
  11. I think you are right there prozak.

    I have never heard someone gloat so much.

    It used to bother me that Biker would go on and on about rubbish, but now contrary information has become much more readily available, so anyone who takes his advice without using their brain pretty much deserves what they get.

    Reply
  12. Pete,
    yeah it’s obvious he is a parody…. just look at his name… “Biker Pete” -reads as “Fat Old and Lazy”….. very good name choice for a parody.

    He also does the classic – “oh if people don’t agree with me they are property bears”… very funny…

    it is a classic because such a small fish would not realise that many people would see his “property empire” as not even large enough to put a deposit on a decent house in Kensington… which I am sure he could tell you all about since he saw the name on the map of the underground when he was in London.

    It would be brilliant comedy if it was original. As it is… it is amusing enough…

    Of course if he is not intentionally being a parody then I truly feel sorry for him… what a deluded person he must be…

    Reply
  13. And sugar is at its highest price in some 20 years!

    Tell me why that is, Biker Pete.

    Reply
  14. Sugar, Justin? We all need a little sweetener in our lives! Now Prozak’s sugar should keep his attitude at altitude, but it’s plainly _not_ working… . ;) Pete… well, Pete… what can I say? He’s never been able to shake the blues: lost money bigtime on property, mum won’t pay any mind to his financial brilliance… and he still forecasts a 40% property crash. With his track record, we should all go back through his posts for illumination and self-improvement. (Old, fat and lazy… ha, ha! Good try, Prozak. Keep up your happy posts, chaps! :) )

    Biker Pete, Rocher Perce, Quebec
    August 17, 2009
    Reply
  15. A good try Biker Pete?

    I try not. I truly believe you are a parody.

    I am appreciating this “little tiddler” property investor character you have created. you could at least thank me!

    The parody keeps me amused. I love the humour.

    Pretending to be some insightful and wealthy property investor is a crack up as the ignorance shines through time and again.

    Adding to that the worldy traveller is a master stroke as again the ignorance is compellingly funny.

    I think what helps is that you probably do have a few properties and you are travelling so you are in an excellent position to parody someone more grotesque and ignorant than you could possibly be.

    Ading the name “Biker Pete” and all the imagery and connotations that go with that is the best bit though.

    Keep up the good work Biker Pete.

    prozak, amused in london
    August 18, 2009
    Reply
  16. Yeah, thanks Prozak. I’m pleased to see you aspire to a ‘decent’ house in Kensington. Good luck with that… .

    Footnote to Pete: When next you conscript a friend or rellie back in the mother country, to support your ‘England is stuffed, Australia is next’ concept, choose one with a tag that has a little credibility, Pete! ;)
    ‘Prozak’ is probably part of your scene, but he’s not _really_ mother’s little helper, son. :)

    Ading?

    Biker Pete, Caraquet, New Brunswick
    August 18, 2009
    Reply
  17. Biker Pete please allow me to interrupt this little exchange to let you know I have posted a link to a interesting article about real estate and the RBA here (it’s in the comments area) I am interested to hear your views about this. I will now exit the arena of combat.

    Reply
  18. Biker: I have seen prozak post here many times in the past. He or she has probably been visiting this website for longer than I have.

    I don’t really have any affiliation with England except that I used it as a basis for comparison in a discussion. I chose England merely because it was ‘not’ the USA, and it is a country most can relate to.

    I don’t quite subscribe to the view that you are a parody, but I can see prozak’s point.

    It is not that you are being conspired against, but rather that more than one person can see straight through your tall tales. Perhaps it is a testament to your mindset that you think this is not possible?

    Perhaps you would have a leg to stand on if you backed up your claims with more than insults and personal attacks?

    Reply
  19. “Biker Pete”, (I chuckle whenever I read or write your name)

    LOL Good stuff. Keep the comedy coming.

    Truly very funny.

    Perhaps for the next part of the parody you could have your character reform and become a decent human being?

    Nah! That would be too hard. keep him obnoxious and ignorant. Much easier to the laughs that way.

    ***eagerly awaiting more comedy from big fish property investor Biker Pete!***

    prozak, amused in london
    August 18, 2009
    Reply
  20. I fear the lady protesteth too much, Pete. Certainly looks like blood in the water to me… relatively speaking! :)

    Biker Pete, Caraquet, New Brunswick
    August 19, 2009
    Reply
  21. G’day, Greg. Unable to locate that link, sorry… . Can you repost, please?

    Have now travelled over 2000 km both coasts of the Saint Lawrence Seaway. Tens of thousands of homes with million dollar views… apparently tightly held. We saw just 24 homes for sale along the north and south shores of the St Lawrence.

    Interesting news from Ottawa, though. Sixty percent of Canadians express anxiety about their financial future. A demographic break-up (retirees, employed, unemployed, graduates, etc) would have been useful, but we can’t find anything specific so far… .

    Mosquitoes are bad, but I see this is a universal problem… ! ;)

    Biker Pete, Caraquet, New Brunswick
    August 19, 2009
    Reply
  22. Hi Biker, I have posted the link to the article here The Australian home prices debate Part 2 It is posted under comment 48.

    Greg Atkinson
    August 20, 2009
    Reply
  23. Justin:

    I was looking this video (its really long) but you may find the information starting at 25min interesting in regards to Sugar.

    http://www.youtube.com/watch?v=dBnniua6-oM

    Reply

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