Fibonacci on the Stock Market

Over the weekend, I saw the Da Vinci Code. Since I’m the only person in the world left who hasn’t read the book, I felt a certain duty to see the film. The movie is OK, but a bit long. The plot revolves around several hidden messages buried in the works of Leonardo Da Vinci. Think “Paul is Dead” goes Gnostic.
I noticed that Fibonacci numbers make a brief appearance in the film. If you’re not familiar with Fibonacci numbers, there are many people in modern finance who take them very seriously. There’s even an entire school of thought that believes that the stock market is a giant code and Fibonacci numbers are the decoding mechanism. I wish I were making this up.


Fibonacci numbers are named for Leonardo of Pisa (aka Fibonacci), a 13th century mathematician. The idea behind the sequence is actually quite simple: Start with 0 and 1, then add the two preceding numbers and keep going. So the sequence goes as follows:
0,1,1,2,3,5,8,13,21,34,55,89,144….
The sequence shows up in nature, and it has some interesting characteristics. For example, if you divide two consecutive Fibonacci (the larger by the smaller), the result converges in on the Golden Ratio (roughly 1.618). The ancient Greeks were way into this ratio. They believed that ratios and proportions were keys to understanding the natural world. The golden ratio shows up in the Parthenon and even one of the Socratic dialogues.
Skip ahead a few thousands years to the 1930’s. An accountant named Ralph Nelson Elliott developed a theory of technical analysis based on the Fibonacci sequence. I won’t go into the details of the Elliott Wave Theory. There’s already plenty of material out there. Plus, there are many competing schools of thought, and I’d hate to get in the middle of a doctrinal war.
But I’ll give you an example of how the Fibonacci sequence (supposedly) shows up in the stock market. The Elliott Wavers note that it’s 55 years from 1932 (the ultimate low point) to 1987, which is also 13 years after the 1974 low, 21 years after the 1966 high and five years after the 1982 low. Fibonacci numbers all.
Did that just blow your fucking mind?
The stock market most recently topped in 2000, 13 years after 1987 and 34 years after 1966. Once again, the Fibonacci numbers are there. I think this means that 2008 will be trouble, but I’m not sure. Sometimes this stuff gets to be like Nostradamus. I can’t make heads of tails of it.
Obviously, this is quackery, but like I said, some people take it very seriously. Of course, if some people believe it and act on it, could we then say that it has some merit?
Nah.

Posted by on June 6th, 2006 at 1:11 pm


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