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What Do You Say Mr. Fibonacci?

|Includes:SPDR Gold Trust ETF (GLD)

Welcome back to the battlefield. Rested and with fresh minds after the weekend we welcomed a new week on the precious metals market. A week full of questions and doubts. How long will gold remain in the region of $1,400? Will we see a drop below $1,321? Maybe the worst is behind us and gold will soon show white candles and growth in the region $1,445-1450? Will silver remain above the support zone between $21.95 and $22.15? Could platinum attack the highs of last month? Or maybe palladium will prove a winner and reach new heights? So many questions so many conflicting answers at the same time.

What can we read in newspapers and see on TV? "You should protect your positions with gold" or "I do not like gold", "gold is no longer a safe haven" or the opposite… "Can we still see new highs on the gold chart this year?" And so on and so forth.

Hands up who's feeling confused? Who starts getting a headache to think about it, hearing the talking heads on television while sipping their morning coffee once again, when every specialist seems to be convinced they're right?

Personally I've had enough dozens of contradictory pieces of data, reviews, relationships, and explanations of why this time the market did not react to macroeconomic data as expected.

So… I decided to turn off the TV, leave the newspapers to others and concentrate on pure charts. What are the most effective techniques to analyze charts? I think that every investor or trader have their favorite ways to analyze price movements. Among the people who read this article one is sure to find the lovers of fundamental analysis, for whom economic data can result in an accelerated heart rate. There are probably fans of Japanese investment techniques with their adoration for black ravens, doji candles and morning/evening stars. Over the weekend I read an interesting and inspiring article about the Elliott's wave theory.

At that point I started to wonder ... If we can surf the Elliott's waves why not utilize an image painted by the Fibonacci ratios…

To the modern world and most investors Leonardo Pisano Bigollo is known as Fibonacci. He is associated primarily with the sequence named the Fibonacci numbers. In the relationship between them you will find the ratio of 1.618 and its inversion, the ratio of 0.618. The most fascinating thing about them is that you can also find these ratios in architecture, nature and they even appear in the human body.

If you're not familiar with Fibonacci patterns yet, you're probably wondering how proportions of the Athenian Pantheon can help you achieve more profitable trades in the precious metals market.

If you're an advanced trader, I'm sure you know well that the use of Fibonacci numbers can be a very simple and effective way to designate the key support and resistance levels. Using all retracements, extensions and price projections, even those with less experience are able to notice patterns that appear on the market.

A quick reminder ... Fibonacci price relationships assume two types of corrections: internal (retracements) and external (extensions).

First of them are in the range of 0-100%. Frequently used are the 0.382 (38.2%), 0.500 (50%) and 0.618 (61.8%) retracement levels. Personally, I use the 0.764 (76.4%) and 0.786 (78.6%) levels treating them as the last stop before a more serious attack on the peak or bottom is seen. Extensions appear when the price movements are going over 100% of the length of the wave for a while. Most common extensions use the ratios of 1.271, 1.500, 1.618. In my analysis, I also use the slightly larger extension of 1.732, 2.0, 2.500, 2.618, or even 3.0 and 3.142.

Let me thrown in a few sentences about Fibonacci price projections. They are based on three data points and compare swings in the same direction. So… it's another way to predict future price movements based on impulse wave or corrective wave. Here I use the 0.764-0.786 zone and the 1.00, 1.272, 1.500, 1.618, 1.732 and 2.0 ratios.

I must admit that this is one of my favorite methods -especially for short-term trading. Perhaps someone asks: why? The answer is: it is very simple and can be successfully used by both novice and sophisticated investors.

Since we have already recalled all the basic assumptions of Fibonacci mathematics, it's high time to look at the precious metals market from this perspective.

Let's take a look at the gold chart.

As we see in the chart above there were two obvious periods to which I applied the Fibonacci price retracements: the 1999 low (on the level of $251) to the 2011 high ($1,920) and the 2008 low ($681) to the 2011 high ($1,920). By combining the two calculations - using ratios of 0.382 and 0.500 we can see crystal clear that gold hasn't reached its first important ​​support level yet which appears to be between $1,283 and $1,310.

Is there any chance that we will see gold at these levels in the next few weeks? A tip comes from the price projections. If you use this technique you can see that there was no effective support based on the ratio of 1.00. Last year's losses lows were reached relatively quickly during the April's decline. What's the next price projection on our ratio list? Yes, the 1.272 ratio! And where is the potential support? At the level of $1,289 level. You think that's a coincidence? It's not a coincidence! It's just math.

Focusing on the extensions of the big pullback from the December 28,2011 low to October 5, 2012 we see that the April's bottom appears just below the important 1.732 extension. That spurred the buyers and initiated a move to the upside. Is it strong? At the present moment - definitely not. Why? The price hasn't even reached the resistance level at $1,505 (0.382 retracement of the whole rally since October 2012 to April 2013.

If we look further for pullbacks we notice that the last one is twice as large as the previous one. What does this mean to investors, traders speculators? Sorry for this note on the side but it's hard to resist the simple Elliott truth that if there is a larger market pullback it initially whispers straight into the ear: it's time for a new bottom (provided that the price does not exceed $1,487).

What will be the first target then? The support zone $1,283-$1,310. Do you need an additional confirmation? Check the extensions of the little pullback from the May 20, 2013 low to Friday's high. What does it show? The 1.618 extension at $1,286.

If we delve further into this topic and prepare further price projections we can find out that the golden rule well known on stock market as "buy and hold" can bring far more disadvantages than advantages this time.

And what if the above-mentioned support broken? Join me tomorrow for a further reading on Fibo maths.

Meanwhile… May the profits (preferably be with you!


Stocks: GLD