Fibonacci series is a very old mechanism to predicting support/resistance and upside/downside moves in stocks. Though it may not be as prominent as other Technical indicators, Fibonacci does give you great insights into the movement of the stock.
What is Fibonacci series and how to Compute?
Fibonacci series are formed using Last 6 months or 1 year data. The Calculations are pretty simple. You just use the Highest High/Close and Lowest low/close and use the difference as the basis for Fib calculations. I am using 2 year Chart of Sensex and will show how one could have predicted the upside that it has made until now.
The Breakdown
Sensex Broke out in July 2007 after consolidating all through the year. Hence, i have drawn Fibonacci lines between July 06 and 07.
If you look carefully, everytime Sensex took a nose dive, it found support around the major fib levels. For example, around March/April, sensex stabilized around the 50% level at 12500 or thereabouts.
Likewise, everytime sensex tried to cross above the 100% mark, it faced some resistance.
Finally in July 2007, sensex went past 15000. This breakout could not last long and Sensex came back and retested the 76.4% fib level around late aug 2007.
Sensex had a major run after this point and even though it should have really tested other Fib levels, it did not. The next level it tested was the 76.4% fib level again. This time to the upside which was around 18820 or thereabouts. Ok, how did we come up with this number? The difference between the earlier high/low was about 5000. 76.4% of 5000 is about 3820. Add this to the earlier high of 15000 and you will get 18820 (give and take a few points here and there).
Sensex corrected a bit around Mid october 2007 and guess what? It kept going down until it tested the 50% upside fib level around 17500. Again, computation is pretty simple. 15000 + 50% of 5000 = 17500.
Ok, so where does this end? If you notice, sensex has been trying hard to cross above 20000. Why? Because this is the 100% fib level. 5000 + 15000 = 20K.
As you can see, it is not that difficult to predict where the stock may potentially be headed to if you are trying to gauge medium-to-short term investments. Fib may not work that well for intraday/<5/10 days timeframe. But anything beyond that, you got yourself a pretty good deal.
What is Fibonacci series and how to Compute?
Fibonacci series are formed using Last 6 months or 1 year data. The Calculations are pretty simple. You just use the Highest High/Close and Lowest low/close and use the difference as the basis for Fib calculations. I am using 2 year Chart of Sensex and will show how one could have predicted the upside that it has made until now.
The Breakdown
Sensex Broke out in July 2007 after consolidating all through the year. Hence, i have drawn Fibonacci lines between July 06 and 07.
If you look carefully, everytime Sensex took a nose dive, it found support around the major fib levels. For example, around March/April, sensex stabilized around the 50% level at 12500 or thereabouts.
Likewise, everytime sensex tried to cross above the 100% mark, it faced some resistance.
Finally in July 2007, sensex went past 15000. This breakout could not last long and Sensex came back and retested the 76.4% fib level around late aug 2007.
Sensex had a major run after this point and even though it should have really tested other Fib levels, it did not. The next level it tested was the 76.4% fib level again. This time to the upside which was around 18820 or thereabouts. Ok, how did we come up with this number? The difference between the earlier high/low was about 5000. 76.4% of 5000 is about 3820. Add this to the earlier high of 15000 and you will get 18820 (give and take a few points here and there).
Sensex corrected a bit around Mid october 2007 and guess what? It kept going down until it tested the 50% upside fib level around 17500. Again, computation is pretty simple. 15000 + 50% of 5000 = 17500.
Ok, so where does this end? If you notice, sensex has been trying hard to cross above 20000. Why? Because this is the 100% fib level. 5000 + 15000 = 20K.
As you can see, it is not that difficult to predict where the stock may potentially be headed to if you are trying to gauge medium-to-short term investments. Fib may not work that well for intraday/<5/10 days timeframe. But anything beyond that, you got yourself a pretty good deal.
