Forecasting Market Turns Using Static And Dynamic Cycles by Brad Swancoat and Ed Kasanjian
Who hasn't heard of Fibonacci ratios by now, but to actually use them in predicting market turns? Here, two software developers give novice and veteran technicians alike a few things to ponder over.
Cycles have long been used by technicians to forecast turns in the markets. However, the student of
cycle analysis can become frustrated by the intermittent nature of regular rhythmic time cycles. The
understanding and use of dynamic cycles will allow the technician to accurately forecast trend changes
weeks, if not months, in advance.
Most of us are familiar with static cycles. Static cycles are characterized by a set interval between events
(such as birthdays, full moons, income tax due dates). Dynamic cycles are just as predictable, but they do
not have a fixed interval between events. Dynamic cycles are distinguished by a constant proportion. One
such popular dynamic is the Fibonacci cycle. The numerical series (1, 1, 2, 3, 5, 8, 13, 21, 34, 55 ...)
obviously is not made up of equal intervals, but the proportion (ratio) between each number is a constant
1.618. The ratio of 1.618 is known as the "golden ratio" and is represented by the Greek letter phi (F).
Figure 1 illustrates the two types of cycles.
The golden ratio can also be expressed as a logarithmic spiral. The relation between each section can be
stated arithmetically as a ratio, because lines in continued proportion form a geometric progression.