For the past few years in this column we have used Fibonacci retracement levels as a tool for understanding resistance and support levels that may appear in charts. However, today in these charts of the Australian dollar measured against the yen, produced by Philip D' Souza, a director of the Australian Technical Analysts Association, we bring some other concepts related to Fibonacci numbers.
Fibonacci numbers, or time counts, are basically a series of whole numbers that run 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377 and so on. The sequence is simply created by adding the two adjacent numbers in the sequence to get the following number. The number sequences are said to have power for they occur in the natural world where they can describe branching in trees and the leaf arrangement on a stem.
In this case, we use them to describe the progress of a trend by identifying tops and bottoms. When a Fibonacci number sequence measures the length of a trend, other tools, in this case the oscillator indicator, can be used in conjunction to measure where the market is likely to go next. If we look at the weekly $A/yen chart, we see that the market peaked in July 2008 around 104 yen to the dollar. Then there was a steep 13-week decline where the market lost 47.28 per cent of its value - 13 is a Fibonacci time count.
If we look below the main chart, we see the oscillator indicator measuring momentum. In this case, there are two moving average indicators. The green or slower line represents the 21-week moving average, while the red is the fast or 13-week average. Note both figures are Fibonacci time counts. When the averages fall below the green horizontal line, the market is said to be oversold; above the red it is overbought.
Indeed, the oscillator indicator did move into the oversold zone at the low points in October 2008, indicating a potential market turnaround. The market did, in fact, turn and entered a sustained rise with some fluctuation within the rising channel.
Applying a Fibonacci time count to the long-term rise, we see it went on for 233 weeks, and rose 91.4 per cent to 105.42 yen on April 12 this year. At the high point, the weekly oscillator indicator was strongly in overbought territory above the red vertical line, indicating a likely change in trend. Interestingly, if we use the monthly chart (not shown here), its long upward rise covered 54 months , very close to another Fibonacci time count of 55 and its oscillator also ended up in overbought territory. Then, a downturn, which ran 20 weeks from the 233-week peak to August 17, saw the market lose 17.98 per cent and again move into oversold territory. It has since recovered, with the price breaking through a Fibonacci retracement level at 38.2 per cent with the 50 per cent and 61.8 per cent levels represented by the blue lines on the chart the next challenges.
We are yet to get a clear indication from the chart as to whether the rising trend will continue or whether the $A/yen market is likely to break out of its uptrend. In some early signs, the weekly price chart is showing weakness and the fast indicator has moved into the overbought zone. Watch the green or slow indicator in coming weeks. If that too becomes overbought and turns down, then we could see support at the red sloping line on the chart. If that is breached, there could be further weakness and a break below the last 20-week trend.
This column is not investment advice.