The Rhythm of Nature and the Markets: Fibonacci

• Posted by Greg Harmon
• on January 16th, 2011

The rhythm of nature has countless examples of the Golden Ratio, such as the head of a sunflower, a pine cone and shell spirals. This ratio also governs many proportions in the human body: the ratio of the hand to forearm, proportions of the torso and the appendages, many ratios in the face and even the cross section of DNA. It was introduced to the western world by Leonardo of Pisa, better known as Fibonacci, in his 13th century publication Liber Abaci, Book of Calculation.

It is no surprise that the pleasing aesthetics of the Golden Ratio can also be applied to the markets. We humans, made in these proportions and exposed to them daily, are the ones trading the market.

Fibonacci Ratios in the Markets

Stepping back to look at the weekly SPDR sector charts shows just how prevalent and important these ratios are.  Every one of these sectors has been influenced by these ratios and many are at key levels now.  Let’s review the moves from the bottom and use this to anticipate where the next move will come from.

The 100%’s

Consumer Staples Select Sector SPDR, XLP, has led the charge from the bottom retracing 100% of the down move by late September and now approaching 123.6% retracement of that move. But it has been looking tired lately, with a Moving Average Convergence Divergence (MACD) indicator crossing lower. Behind the Staples are Industrials Select Sector SPDR, XLI, Technology Select Sector SPDR, XLK and Consumer Discretionary Select Sector SPDR, XLY. These sectors are all approaching the 100% retracement of the down move having left the 76.4% level behind. Below is the chart of XLY. Note the symmetry of the move as it is reaching the 100% retrace level almost precisely at the Fibonacci arc, how the price action is leveling as it approaches 100%, and how it moved steadily between the 61.8% level and the 100% level.

Consumer Discretionary Select Sector SPDR, XLY

The 76.4%’s

Materials Select Sector SPDR, XLB and Health Care Select Sector SPDR, XLV are next.  They have retraced about 76.4% of the down move and are now moving higher. These sectors may be the new leaders going forward as they try to get to a 100% retracement. This has been a troublesome level for XLV as noted on the chart below.

Health Care Select Sector SPDR, XLV

50% to 61.8%

Energy Select Sector SPDR, XLE  just untangled from the 61.8% retracement. As it breaks away look for it to be a new leader. This may take a little time as is getting a little over bought on the Relative Strength Index (RSI) from a look at the chart below.

Energy Select Sector SPDR, XLE

Utilities Select Sector SPDR, XLU is still attempting to reach the 61.8% retracement, breaking the 200 week Simple Moving Average (SMA) again after spending the better part of two years under it.  A solid hold over the next few weeks could signal a return to the positive run for good.

23.6% to 38.2%

Financials Select Sector SPDR, XLF has been the laggard only Friday retracing 38.2% of the down move. This sector looks very promising going forward though. The MACD is pointing higher and all the SMA’s are lifting.

Financials Select Sector SPDR, XLF

Signs of a Rotation

The XLE, XLU and XLF are all trending higher now. Should they continue over the next several weeks the rally will no doubt advance. Watch for these sectors to take over from and close the gap with XLI, XLK, XLY as they may start to stall at the 100% retracement levels.  Also watch for the leader, the defensive sector XLP, to fall back to the pack.

(As always you can see details of these individual charts and more on my twitter feed and on chartly.)

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