This strategy is designed to help you to figure out whether you should position your long term investment account aggressively or defensively. For the purposes of this demonstration, I have drawn my from the bottom after the Tech Bubble pop in 2000 to the peak of the Housing Bubble in 2007. I will post another Chart in which I will draw the Fib Arc from the bottom of the early 2000's Bear Market to the peak of the Tech Bubble.
1. Use Monthly Candles
2. Add a 21 month and a 10 month to your chart
3. Add a standard Curve below your Chart
4. Draw a from the most recent peak to the most recent bottom of the previous market recession. If the market is in a recession, draw a from the lowest low to the highest level of the previous bull market. To determine safely if a recent peak or trough is the peak of a Bull Market or the Trough of a Bear Market, wait for the crossover and for the Curve to become negative. Your earliest indication would be the Curve to turn negative, however there were a few occasions back in the 80's where the Curve turned negative while the 10 month remained above the 21 month .
How to Interpret:
The goal of charting this way is to identify when the market will become or . This is important because positively identifying a Bear or Bull Market is necessary in order to understand how to position yourself in the market. In a Bull market, you want to diversify your portfolio more aggressively to take advantage of growth. This may involve investing more in common stock than bonds. Likewise in a Bear market you want to diversify your portfolio more defensively. You may choose to hold less common stock and more bonds.
Prices near a Fib target on the arc: In a Bear market this may represent an area of support, and in a bull market they will represent a possible area of resistance. Likewise once the price crosses the line, it becomes an area of .
curve turns negative and crossover: This is almost definitely . During the down trend, expect the price to remain below the 10 month most of the time.
curve turns negative but no crossover: CAUTION. If you have long term aggressive trades that are profitable, you may want to take profit. During this time it is safest to redeversify your portfolio to be more defensive. However a risk loving trader might see this as a opportunity to scoop up cheap common stock. This worked from about 1988 (after the 1987 crash) to about the end of 1989. However in the recent decade, this hasn't AT ALL BEEN THE CASE. Again IT IS SAFEST DURING THIS EVENT TO RE-DIVERSIFY INTO DEFENSIVE POSITIONS.
Curve turns positive but no crossover yet: This likely indicates the end of a Bear Market. It is safe to rediversify back into more aggressive positions. However a risk adverse investor should wait for the 10 month to crossover the 21 Month
Curve turns Positive and crossover: The market is now . It is safe to rediversify more aggressively to take advantage of the Bull Market.
To conclude, this strategy should help you to maximize the returns in your Long-Term investment accounts.
Always remember: "What we can learn from the past is that the future will always surprise us".
-It is always useful to identify areas of support and resistance in any market/index/asset. The Fib Arc is useful for helping you to do this. For Example: after the 2007 housing bubble, the 0.764 Arc line is very close to where the market bottomed in 2009. After the Price moved above the 10 month EMA, punched through the 0.618 Arc line, and the Coppock turned positive, this was a fairly useful early indication that the Bear Market was ending. Not that much later, the 10 month EMA crossed over the 21 month EMA.