If you have heard of Leonardo da Pisa then you may already be familiar with the story of how he described the growth of two rabbits into a population and thus presented the Fibonacci sequence. This powerful force in nature is pervasive. But it does not stop in nature.
Perhaps because we are so exposed to the sequence and the ratios that it creates, it shows up in human output as well, like artwork. It also plays a role in markets. The current price action in the S&P 500 ETF is showing the impact of Fibonacci ratios, the ratio of adjacent or nearby numbers in the sequence.
Many know the big ratios, 0.618 or Φ, the ratio of adjacent numbers, 0.382, the ratio of numbers 2 apart in the sequence, and 0.5, halfway, but there are lesser known ratios at play as well. The square root of Φ or 0.786 and the square root of that 0.886 also become important. Also the ratio of numbers 3 apart, 0.236 plays a role.
The chart above shows the current situation. After a move lower from the high in the fall to the Boxing day low, the SPY has been moving higher. Let’s examine the places it stalled along the way. The first stall occurred at the 23.6% retracement as it turned into a bull flag. Next a flat consolidation at the 38.2% retracement. As it reached the 50% retracement, which happened to be at the bottom of the October through December consolidation range it ran sideways again.
A jump from there to the middle of that range and it stalled at the 61.8% retracement. When it resumed the path higher it paused again at the 78.6% retracement of the full move lower, which coincided nearly perfectly with the top of the October to December range. A pullback and then another stall at the 78.6% retracement. It eventually broke free and moved higher and is now consolidating at the 88.6% retracement.
Will it break free again and push up to a full retracement next? And what happens after that? No one can know for sure. But it should fascinate you that each of these ratios has played a role in the move higher. Perhaps in a little time we can explore the Fibonacci extensions above the full retracement.
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