Monday, June 18, 2007

Phi Ratios

"The good, of course, is always beautiful, and the beautiful never lacks proportion."


This is the slope of the Fibonacci sequence of numbers. In this sequence each number is the result of adding the previous two numbers.


This sequence can keep going on, but this is enough of an example to make the simple point about the ratio between each number in the sequence. The ratio of each successive pair of numbers in the series approximates phi (1.618. . .) , as 5 divided by 3 is 1.666..., and 8 divided by 5 is 1.60. In the 12th century, Leonardo Fibonacci discovered this simple numerical series that is the foundation for an incredible mathematical relationship behind phi.

This ratio and relationship of numbers can come in handy in when studying charts for entry and exit points. This can be a result of a hidden sense of order or just a self fulfilling fact because so many people use this concept and write computer programs to filter for these ratios.

There is a tendency to look for prices to flow along in what many feel is an orderly fashion similar to a 45 degree angle. This can happen at times, and often a 45 degree long term trend line can act as support. It real world trading, very often prices pull very far away from this ideal trend line and act in a bullish boom to bust sequence. This sequence is healthy and a product of human actions of hope, fear, greed, and at times irrational exuberance. This boom to bust sequence follows this phi ratio. In the chart above of Chindex International, the blue boxes mark these little boom to bust sequences. The bust part of the sequence isn't a bust in price, but more of a consolidation of prices. The bust can be in the hopes of people who bought the high, as their hopes were replaced by fear. Once the actions of fear are acted out, then the sequence can start again.

Looking for a triangle pattern in these type of scenarios can make entries and exits a little easier; eliminating the tendency to act out of hope and fear.

This is the same chart of Chindex International with one triangle marked. Applying the Phi sequence ratio to determine price targets is not very difficult. Count the days in the formation of the triangle to determine the midpoint. Then take this midpoint number and multiply by 1.618,2.618, and 4.238. These ratios are calculated by dividing out numbers in the sequence.

144/89 = 1.618
144/55 = 2.618
144/34 = 4.23

This triangle strategy can work on many time frames. An example in an earlier post can be seen here.

This is a chart of Interoil International, another example of the sequence being applied to give estimated targets and eliminate the hope and fear battle.


This is a chart of the S&P 500. Today is an important day to see if the market can hold the gains from Friday which occurred on higher volume. This volume was because of option expiration, but still is a key day to watch going forward. Based on the opening range strategy, 1547 is the next target, with the old high from 2000 not far from that level.


CHDX - Chindex International, Inc. (Chindex) is engaged in the provision of healthcare services and the sale of medical equipment, instrumentation and products in several healthcare markets in China, including Hong Kong. The Company operates in two business segments: Healthcare Services division and Medical Products division.

IOC - InterOil Corporation (InterOil) is developing a fully integrated oil and gas company in Papua New Guinea and the surrounding region. It has four business segments: Exploration and Production, which is the upstream business segment that explores for oil and natural gas in Papua New Guinea; Refining, Marketing & Liquefaction, which is the midstream business segment that markets the refined products it produces in Papua New Guinea both domestically and for export; Wholesale and Retail Distribution, which is the downstream business segment that distributes refined products in Papua New Guinea on a wholesale and retail basis, and Corporate.

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