Phi Ratios

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

Plato



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

1+2=3,3+2=5,5+3=8,8+5=13,13+8=21,21+13=34,34+21=55,55+34=89...

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.

Off To The Races Again...

This is the updated chart of the S&P 500 showing support and resistance levels based off of the yearly opening range. The market held the 1500.43 area and in yesterday's rally went right to the 1524.10 target. The next target level is 1547.77. Which group will carry the market to these levels? The energy sector has been a leading sector, and technology has started to receive some analyst upgrades the last few days. Its going to take a group effort to get to that next level. Today is option expiration so volume should be high, if the futures, which are up 10 right now, can hold their gains, it could be off to the next level.



This is the corresponding chart for the Nasdaq Composite Index.

Having been trading from the short side of the market the last few weeks, the opening range system has been a great trigger on when to cover trades and actually go long the market. Buying dips is still the method that is working. As bad as some sell offs feel, they don't seem to have very much follow through. When the market opens following a large down day, it doesn't take long for selling to dry up and short covering and buying to follow. It is a great trading environment. Below are two charts for the intra-day futures from Wednesday and Thursday. The levels are marked along with the opening ranges. A review of this concept can be read here.



It doesn't take to many days like this to make a great month.

This is the same chart with Thursday's range and target.



The next article will deal with why certain levels are real targets and other should be ignored. This is can be a very important edge in the options market and when setting price targets. The slopes below hold some clues. Trade charts that have Fibonacci slopes.

At The Crossroads...

"Do you really like a particular stock? Put 10% or so of your portfolio on it. Make the idea count … Good [investment] ideas should not be diversified away into meaningless oblivion."

Bill Gross

--------------------------------------------------

The S&P 500 has retraced 50% of the down move from the end of last week. This puts things at an interesting juncture. The bounce has been on very light volume and after a great recovery from the end of February-beginning of March sell off might make the thought of taking some chips off the table a prudent idea. How much more upside does the market hold with the current technical pattern? For a move higher to continue, a consolidation in both price action and time is needed to base any move off of. As this forms, it is likely that certain levels will be tested to see what underlying strength really exists.



This chart shows the S&P 500 with opening range target levels marked by the dashed green lines. The recent price move is measured by a standard Fibonacci re-tracement calculator. The 2 day rally reached the 50% level of the sell off shown by the three large candle stick days. These three selling days were also accompanied by increasing volume. The two recent positive days however happened with very light volume, indicating that the buying interest/pressure was not as strong as the previous selling.

Some number to watch today are below:
Pivot 1509.33 (High + Low + Close)/3
3Day Pivot 1509.03 (Highest High 3 days + Lowest Low 3 days + Close)/3
Close 1509.12

These three numbers are all extremely close together. Any significant move above or below these numbers could prove to last for a couple days. With the weakness in volume the last 2 days, a move below could come with an increase in volume. The next opening range levels are 1500.43 and then 1476.76. How the market acts around these numbers could be important.

Recent Low 1487.41
+2 Level 1476.76
Fib Extension 1453
+1 Level 1453



This is an intra day chart of the September contract for the S&P 500 futures for the last week. It shows the size of the sell off and how the market is in an area that the recent 2 day rally could stall. This minor trend line is important to watch. It is also worth noting that this is the September Contract, and some rollover trades effect volatility. This Friday is when June options expire and June futures will stop trading and September will be the lead month. The opening range system can be applied to the first 3 days of this new contract.

Here are some corresponding charts for the OEX S&P 100 and the Nasdaq Composite Index.





_______________________________________

Hoover's has been a great resource for researching companies. It is a very thorough product and offers a great base of knowledge and information all in one place. It has information that usually takes trips to two or three sites to find on your own.


Hoover's provides access to the essential information you need - the way you need it. Whether it's generating sales leads or developing long-term competitive strategies, Hoover's delivers complete, easy-to-use, quality data across your organization.

A trade that worked great back in February/March might work again if commodities stay strong. The post Red Right-20 Bingo Cross covers the idea. Below are the current charts.





Has the realization that rates are going higher caught people off guard? From the look of this chart that is what has happened. This is magnified by the roller over from the June contract to September being the lead month. Things could calm down, but there are still people on the wrong side of this trade.

Advance/Decline Ratio and Opening Range Swing Levels

"Fiscal policy is the other ladle in the macroeconomic punch bowl, and consistency in use of the two ladles is powerful, and inconsistency can be injurious."

Robert Rubin
--------------------



Today and probably this weekend will be a time many of the carnival barkers on television will bring out ever cliche to describe the events and sentiment over the past few days. Prices can not go up every day, and when they do it can come with a price to pay when they don't. The chart above is of the S&P 500. It includes the advance decline moving average(red line in the top pane), and the target levels based off of the opening range from the beginning of this calendar year. The next support line is 1476.76, and should that not hold, 1453.09 is next. As volume increased yesterday, there should not be a rush to buy. It is worth it to wait for a short term base to form before looking for an entry. The sell off in the end of February and into March is market in the green box. As prices started to stabilize, there was a clear divergence in the advance/decline moving average. Prices made a lower low while the moving average showed that the new low prices didn't have the same selling momentum as the sell off before. This showed that it was time prices to reverse. It will take time for this setup to happen again, but it is worth the wait. Don't try to catch a falling knife--cliche #1.



This is the corresponding chart of the Nasdaq Composite Index. It had the same divergence set up in March. Its rally was not as strong as the Energy/Commodity heavy S&P 500, but it still put in a nice short term bottom.

Interest rates are something to keep on the radar screen. In this part of June the holders of futures contracts are closing positions, expecting to take delivery, or rolling over into the September futures contract. In past years this has caused extreme moves. Not so long ago there was the opposite move when one of the largest firms decided to hold their contracts and take delivery in a market that was overly short with not enough physical bonds to deliver. This caused rates to go down as this roll over occurred. In this cycle holders of long futures expiring in June were forced to sell and roll over into September to maintain their long positions. This is not the reason rates go higher, but it just adds to the velocity of the move. So June, September,December,and March are months to watch.

Below is a chart showing the 30yr and 5yr interest rates. This straight up move as of late should slow, but this won't mean that all is clear and rates are going lower. Don't get fooled by the same talking heads on television that said the Fed was going to stop raising rates at 4.25%. Inflation is global, no matter how manipulated our CPI number is.



--------------------

For those traders not accustomed to shorting stocks or shorting futures to take advantage of down moves, it can be a great time to do research and develop ideas for when the market bottom comes. Charts are one aspect of picking levels, but digging around in fundamentals can lead to discovery of entire sectors that could prove profitable on the next move up.


Value Line -- 71 years of Proven Performance

Trading System Idea 1 and Interest Rates

"I would rather have a mind opened by wonder than one closed by belief"

Gerry Spence




This is a chart of the S&P 500 Index year to date. The top pane shows the red moving average for the advance/decline ratio. The dashed green lines mark the levels based on the opening rage system discussed earlier; to review click Here. The bottom section of the chart shows an indicator called the Directional Movement Indicator. This indicator is comprised of 5 factors, but for the time being charts here will deal with just three.

The red and blue criss/crossing lines are -DI and +DI respectively. When the +DI crosses above the -DI it is considered bullish. If just using this indicator to establish long and short positions, this cross would result in a buy. The last cross occurred on 4/13/07 and a long position would have been established at the close, 1452.85. The +DI is still above the -DI so this indicator would still be in that long trade.

Indicators by themselves can be triggers for getting into and out of trades. They can also be combined with other indicators depending on if the market is trending or range bound to assist in developing a system that can help take the emotion out of trading/investing. Combining indicators with pattern recognition formulas and then adding risk management parameters can result is some really useful trading systems. The end result is a complex system, but each piece can be simple by itself. Over the next weeks, a system will be built using Directional Movement Indicator as a base. Many more indicators and pattern formulas will be add one at a time. This will NOT create a holy grail trading system, but a functional one that can be used as a basis for bigger and better things. The money management formulas will be the last part, because money management is the most important aspect of trading. A really poor system can work with exceptional disciplined money management parameters.

Below are two reports from running +DI crossing over -DI on the S&P 500 and the Nasdaq 100 Indexes. These are not complete systems, these are just for informational purposes as to the potential this indicator might have as a foundation to build upon. Theses reports were run from June 1999 until June 5, 2007.







These results are just for the long(buy) side of the system, there were no short trades. There isn't much that sticks out as fabulous about these results except that the winners are larger than the losing trades, and that one result had more losing trades than winners, yet was still positive(NDX 16 winners, 20 losers).



--------------------
A look at interest rates....