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rice high and low will be exceeded。 In a contracting cycle； traders。are stopped out by entering the market too early； only to see the market reverse and take off without them。 In an expansion cycle； the trader's。entry level is。never achieved。 The market reverses； forcing a chase that increases。the capital risk。and pels。the trader to establish a smaller position as。the opportunity slips。away。 For this。reason many abandon the use of Fibonacci ratios； they feel they work。only some of the time。 In essence； they are right。 But Fibonacci retracements。are not the problem； it's。their application that needs。to be changed。
Figure 5。1 displays。the current monthly continuous。futuresntract for crude oil。 The monthly chart shows。the recent market decline into November of 2006 and raises。the first question： how far will this。decline carry the market？ Although sharp； this。is。a correction only。if the scenario into 2012 isrrect。 This。is。the important pullback。for the long…term horizon； therefore； we need precise targets。to monitor。 This can be done using multiple Fibonacci retracements。
When defining support for a correction in a rallying market； always start at the top and only。then select a low。 The first point selected should be zero。 The first calculation within the range below zero should be a value of 38。2 percent； followed by 50 percent and 61。8 percent。 The price low selected at the bottom of the range is。100 percent。 Bloomberg does。these calculations correctly； but TradeStation defines the first point selected as 100 and reverses。the order。 Recognizing a 38。2 percent and 61。8 percent ratio will fall on the same price levels。within the range； it bees。understandable why different quote vendors。have different opinions。about how this。should be programmed。 However； most vendors。force the user to remain generic and take away the user's。ability to use the geometric。proportions。that develop within the market's。data swings。 Study the charts。in this。chapter and pare the steps。to your vendor's。tools； and it will bee clear whether the vendor is。backward。 TradeStation doesrrect its。logic。in the Fibonacci expansion tool。 CQC will draw its Fibonacci levels。backward； away from the newest data in your chart。 Setting the default to extend the lines across the entire screen will fix this。
You may find some vendors。have a default value of 75 percent。 Turn this。off； as。well as。any other range offered as a default。 Just use the primary three listed。 It doesn't matter whether you add； subtract； multiply； or divide a Fibonacci value； because it will always。product another Fibonacci ratio。 Therefore； we will。calculate the other ratios。by using multiple ranges。 You'll see how this。bees。important in Figure 5。4。
In Figure 5。1； the same price high is。used for two different Fibonacci retracement calculations from different ranges。 The lows。selected are internal pivot points。within the larger swing。 Each is。selected for a reason。 Look。for reversals。that develop directional signals。such as。key reversals； gaps； and secondary retracements。that begin strong swings。within the larger trend。 These internal milestones。are markers； revealing the price levels。the market is。using to build future price swings。 There are discernable mathematical relationships。between one key market pivot and another that tie the pivots。together within all time horizons。
The important price levels。can be identified by starting at the 〃top〃 and then examining each pivot price low as。a possible new range。 In Figure 5。1； bold lines。clarify the start； end； and resulting subdivisions。within the range。 The 01。8 ratio bisects 50。 It is highlighted with an arrow。 With just one Fibonacci grid in place； it's。impossible to know whether the levels。within the subdivided range are major or minor support。
Starting from the same high； a second low is。selected； just under 30。 The resulting subdivided range produces。a 50 percent retracement near 50； which overlaps。the 01。8 percent retracement from subdividing the first range。 These different Fibonacci ratios。that overlap form a （（influence target； which is。major support。
If this chart were inverted to represent a market in a downtrend； producing a sharp upward retracement； the calculations。for resistance would always。be started at the bottom； and then price highs。would be selected。 Starling retracements in this。manner allows。the internal swings。to be examined。 If you start in reverse； you are always。forced to go straight to the market extreme top or major bottom； and the internal dynamics。of the data would never be considered。
Price Projection Using Geometric Proportion
The monthly chart for crude oil futures。in Figure 5。2 includes。a third range to the price low； at the bottom of wave 2。 The confluence zones。that form define major support for this current decline at 56； 50； and 44。 However； an important change was made in Figure
5。2。 All the Fibonacci ranges。start from a price high that truncates the spikes。into the double top。 That's done to clearly illustrate that the same starting point is。always。used for each range selected； but the price high itself is。not always the best place to start。 Sometimes it makes。sense to truncate spikes。when the majority of closing periods。fail to record a close within the range of the spike。 To simplify the chart； add a horizontal line at the continence zones。to mark。major support targets。 The targets。in Figure 5。2 are near 56； 50； and 44。 In practice； it is。important to be aware of the width of the confluence zone and not just a single value within the target range。
A 14…period relative strength index （RSI） indicator。was。added to the bottom of Figure
5。2。 An oscillator can confirm the key pivots。 In this。chart the 14…period RSI has。two moving averages。 The averages。are calculated from the RSI； not from price。 Moving averages。serve as。support and resistance levels。for the indicator。 Points。P and Q mark。two momentum extreme lows。 Notice the character of these momentum lows。 Both form a W pattern before the market successfully。engages。in a strong advance。 Past character is。nearly always repeated in the time frame being studied。 So we know two things。from reading points P and
Q： First； this。market likes。to produce a plex W； so we need not take the reversal seriously until it does。 Second； the market does。not have such a pattern in place now。 It can further be said this。market may be oversold； but it has。not defined a final bottom。 Because the market is。at 56； the confluence zone under the market bees。the more likely target at 50。 An extension would allow a move to 44； but just under this。zone bees。the precise area at which the market should not trade if the opinion is correct that this。market will make a full retracement back。to the highs。 Knowing where the market should not go gives。us。a clearly defined risk…reward ratio。 It also clearly defines。a level at which the implications。for global rates。and equitiesuld change。 For this reason； the decline is。setting up the long…term picture in financial markets。
The confluence zone defining a price target at 50 is。of particular interest。 If you find the Elliott Wave Principle a challenge； this。approach will be invaluable to you。 Notice the swing lo