Technical Analysis: Interesting Development In The Dow

I was doing some work with Fibonacci retracements this afternoon and found a particularly interesting confluence I thought I’d share with you.  It’s on the Dow Jones (^DJI) and it involves the current low and how it almost mysteriously fits within the current structure.

Dow Jones Weekly Chart:

First, let me start by saying this is not the ‘classical’ way to use Fibonacci, but stay with me for a minute.

Constance Brown in her book “Technical Analysis for the Trading Professional” describes a method of drawing current Fibonacci grids and using them as projections, and to look backwards to ‘eyeball’ if the grid is containing price swings relatively accurately or not (I recommend this book but some of the concepts are quite complex, and there’s no way I could adequately explain her Fibonacci method here).

That being said, the ‘normal’ use of Fibonacci was doing what I was attempting, which is to start with a swing high (14,198) then drag to a swing low (7,450) and then draw the Fibonacci grid upwards to figure out where a possible up-swing move could run into resistance (or for setting price targets).  That’s what the blue numbers actually represent, and that’s the most common interpretation you’ll get for a Fibonacci grid and you can leave it at that before moving on to the ‘eerie’ portion.

However, what’s fascinating (and potentially monumental) is that the entire Fibonacci grid represents the perfect 38.2% retracement which stopped the January down-move, and the 50% retracement which stopped the July move, both to the near exact Index Level which I find endlessly eerie.

Connie Brown describes using this exact technique to project price targets using a standard grid.  Meaning, say in January, you could have extended the grid to make it look like this (of course there would be no price action to the right) to have received the same grid.  Actually, it would have been a better practice to do so in July (lows) when you could have seen the price terminate at the 38.2% retracement as well at the 50.0% retracement and then drawn the grid down to the 7,450 lows for a target.  Now, that’s an extreme (mis)use of Fibonacci, but I am quite intrigued that the current Dow lows forms this completed structure.

What might this mean?  I’d recommend reading Mrs. Brown’s book for more information, but if her method is correct (or at least I’m interpreting it correctly), then this recent Dow price low could be part of the larger structure that will hold in at least a short-term bottom here, which is confirmed by past Fibonacci price action.

Even if you don’t want to take it that far, you have to admit that it’s a little strange that the January and July price lows coincide exactly with the respected large-scale Fibonacci relationships of the broader down-impulse.

If anything, it’s just a neat little pattern to help try to add some potential structure to this wild recent market action - if that indeed can be done.

Posted in Categories: Contributor, External Research, Stocks, USA.

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Comment by Henry

2008-11-24 07:08:49

Hi,
Drawing a fibonacci from the high (11Oct2007) to low (12Mar2003) will be more usual and it also fits amazingly.
Cheers,
Henry

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Comment by Corey Rosenbloom

2008-11-24 20:21:41

Henry,

Agreed, but I was trying to highlight a rather peculiar development or strange development in the Fibonacci grid when I was attempting to draw a retracement to see how far the possible upcoming rally will be.

It just so happened that the last two major market swing lows occurred at a key Fibonacci level from this move, which reminded me of the unusual technique taught by Constance Brown.

I just recently posted an additional observation taking the Dow from 1975 to present and noting the significance of the 7,382 level in a recent post:

Large Scale Fibonacci in the Dow Jones: http://blog.afraidtotrade.com/large-scale-fibonacci-in-the-dow-jones/

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