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Written and copyright © 2011-2013 by Thomas N. Bulkowski. All rights reserved.
What is a Fibonacci Extension?
I show a picture of DuPont (DD) on the daily scale to illustrate what a Fibonacci extension is.
An extension is just as it sounds, a lengthening of the AB move. If the AB move
represents a 100% gain, then point D would be some multiple of that (even if the multiple is a fraction). Many will claim that the multiple will be a Fibonacci number, such as 38%, 50%,
62% or higher, such as 138%, 162% and so on. The retrace to C does not affect the extension computation. The extension measures from B to D.
In this example, the move from A to B is 3 points. The move from B to D is 6 points (all values are approximate for simplicity). Thus, the BD move is 200% of the AB move. It's a
200% extension.
How often is the extension a Fibonacci number? Another way of asking that is, can we say that if price approaches a Fibonacci multiple that it will be more likely to hit overhead
resistance than any other multiple? The short answer is "no."
Fibonacci Method
I programmed my computer to find the ABCD move in every stock I follow and some that I used to follow, or almost 1,500 securities. I only included data from stocks priced over $5 per share
from the start of the bear market in March 2000 to April 27, 2011.
Using 21,626 samples from a bull market, I did a frequency distribution of the BD gain as a percentage of the AB move in 5% increments up to 180%. If the Fibonacci extension believers are correct,
then I should see spikes at 35% to 40%, around 50%, 60% to 65%, and so on.
There were no spikes. Only at 100% do we see a marginal increase in the number of hits from 264 at 95% to 277 at 100% and 223 at 105%. Based on this test, using a Fibonacci extension
will not see price hit overhead resistance there. I also extended the frequency distribution up to 350%, but the percentage trend didn't change. There is no overhead resistance prevalent at
any Fibonacci extension number.
Fibonacci extensions work no better at predicting where price is going to turn than any other percentage.
-- Thomas Bulkowski
Written and copyright © 2011-2013 by Thomas N. Bulkowski. All rights reserved. If it's worth doing, then it's worth overdoing.
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