Fibonacci Prediction Revisited

Previously we have discussed the importance of the Fibonacci ratios in predicting possible levels of support/resistance after a significant turning point. In summary, when the price action was originally in an uptrend, the ratios gave us possible levels of support on the pull-back. When the price action was originally in a down trend, the ratios gave us possible levels of resistance to the rally.

Conversely, Fibonacci ratios can be used in a trending stock or index to predict possible turning points, rather than retracements from the turning points. In practice, the ratio of 1.618 is applied to predict the possible target area for that rally. We project from the last major turning point a value that is 1.618 times the magnitude of the most recent price swing.

Practical Example

Zinifex was one of the most favoured stocks for traders and investors. Lets have a look at the share price for Zinifex (ZFX) since the start of November to the 8th of December 2006. As you can see the share price rallied up till a high of $17.06 on the 7th of November (aqua box). After this the share price decreased to the lows of $14.21 on the 17th of November (grey box).

In the above chart you can see that again the Fibonacci Prediction level was reached on the 5th of December (yellow box).

Manual Calculation

If you don't have a charting package that will work out the prediction level for you then dont' worry because the calculation of the Fibonacci Prediction is simple.

STEP 1: HIGH minus LOW
STEP 2: Difference multiplied by 61.8%
STEP 3: Add this figure to the High

This method gives the prediction price of $18.82. The actual price (yellow box) that the share price got to was $18.74. A mere 8 cents off. That's pretty close.