SPY Analysis

This chart shows a trend-based Fibonacci retracement. The trend points used are (1) The market high right before the 2020 selloff, (2) the market low from the 2020 selloff, and (3) the most recent market high (in January 2022).

As the chart shows, SPY has nearly perfect retraced back to the Golden Ratio. My expectation is that SPY will rally into and throughout July 2022.

• What are Fibonacci numbers?

Fibonacci numbers are merely a series of numbers in which each successive number is the sum of the prior two numbers. As the series grows, the ratio of each Fibonacci number to the previous Fibonacci number in the series converges to 1.618. Meanwhile, the ratio of each Fibonacci number to the next Fibonacci number converges to 0.618. These ratios often help us mathematically predict important support and resistance points of price action.

• Do Fibonacci numbers actually work?

The stock market has always conformed to Fibonacci numbers both because many traders use them and it is thus self-fulfilling, but also because Fibonacci numbers help us mathematically approximate the ebbs and flow of crowd psychology and the fear and greed which dictate market participants' actions. Each time fear takes hold, market participants sell and cause price to fall back to a previous Fibonacci number (often the Golden Ratio, reflected as the proportion: 0.618). Then once the pervasive fear wanes, market participants begin to get greedy as they see a buying opportunity in the lower prices of the market. The fear that once caused selling then shifts to a fear of missing out on profit, and greed regains control of the market. Just as selling begets selling, buying begets buying, and so price continues up to a higher Fibonacci number, thus forming a pattern called the Golden Spiral.

If you don't believe that the stock market has always conformed to Fibonacci numbers, try drawing a Fibonacci retracement level on the S&P 500 (SPX) from its all-time low in 1877 to its high in 1929 just before the Great Depression. You will see that the low point of the Great Recession was, of course, a Fibonacci ratio.

This is just one of an endless amount of Fibonacci sequences that the stock market has followed over the years. Fibonacci sequences dictate price action on all timeframes. To the uninformed person, these endless golden spirals that dictate price action on multiple timeframes simply seems random...

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It's important to note that traders should not use Fibonacci levels in a vacuum. A basic tenet of successful trading involves confirmation among indicators and oscillators. Additionally, be sure to check Fibonacci levels on various timeframes.

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Another pro tip is that Fibonacci levels are a huge benefit for price discovery whenever price enters into uncharted territory.

For example, if a stock is on a tremendous bull run and making new all-time highs, Fibonacci extension levels can help approximate good levels to take profits or to trail stop-losses, each time price surpasses a new Fibonacci level.

On the flip side, for IPOs that have fallen below their initial offering price, Fibonacci retracement levels can help price discovery to the downside by extrapolating bottoms. For IPOs that have fallen below their initial offering price, draw a Fibonacci retracement beginning at the highest price ever achieved and ending at zero. When the price stops underperforming the market and begins to consolidate at a Fibonacci retracement level, the price has likely bottomed. Even if one is wrong, these levels make for great risk-to-reward entry points.

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It's also important to note that Elliot Wave Theory is based in part on Fibonacci numbers. That theory states that impulses come in 5 waves and corrections come in 3 waves. These are Fibonacci numbers and this wave formation pattern is essentially the golden spiral...

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Meant to write "Great Depression Low" in my second chart