The Rhythm of Rare Earth

Leonardo da Pisa, was quite possibly the most talented mathematician of the Middle Ages and is known for spreading the use of the Hindu-Arabic numeral system used today and a number sequence that bares his more common name, Fibonacci. The Fibonacci sequence brought forth the discovery of the Golden Ratio which is found throughout nature. Almost a rhythmic ratio. It has also been applied to the stock market by traders with great success. Let’s tie those two together then and examine how this ratio can be applied to trade 3 rare earth stocks, since rare earth elements do come from nature.

Rare Element Resources, Ticker: REE

Rare Element Resources went through a two staged rise from a bottom in July 2009 through the mid December low, to the high on January 3, 2011. This is illustrated by two sets of Fibonacci retracement lines. The blue lines represent retracement levels from the total move and the magenta lines for the smaller move. Notice how important these lines have been since making a top (If you get dizzy easily skip to the next paragraph here). From the top the price moved lower stalling at a 23.6% retracement of the minor move and then bouncing after retracing 50% of that move. The bounce was capped at the same 23.6% retracement level and then it fell again stopping briefly at the 50% retracement before finding support lower at the 61.8% retracement level. From there it moved higher again to the 38.2% level and after briefly exceeding it fell back to the 50% level. At that point it rose to the blue major move retracement level at 23.6% and then back to the magenta 61.8% retracement and is now at the blue 38.2% retracement level.

Did you follow all that? Me either, the point is that nearly every reversal happened right at a Fibonacci level. Also did you notice that every other indicator has been removed from this chart? Using just the candlesticks and the Fibonacci levels you could trade this stock with great success. So what do the Fibonacci’s say about the future of REE. The Doji candlestick suggests a move lower and if it does go through the 11.51 level then you could expect that it will move lower to the next Fibonacci line at 9.53 and possibly the one at 9.12 below it. Until it goes above the 12.48 line it is in no man’s land. This method of trading applies equally to Molycorp, and China Zhou Mining and Resources. Here is the Molycorp chart, ticker MCP.

Molycorp, Ticker: MCP

First notice how the Fibonacci’s are useful on this chart as well. This bearish engulfing candle on this chart combined with the Fibonacci’s suggest that this stock is heading lower to at least 44.83, a 50% retracement of the minor move from November until the January 3rd high. You would put a stop at the next higher Fibonacci level at 49.07. What about China Zhou Mining and Resources, ticker SHZ, shown below.

China Zhou Mining and Resources, Ticker: SHZ

The Fibonacci’s have also clearly played a role in SHZ. This chart would suggest a long entry on a break above 5.40 and a failure to break it as a short entry with a target of 4.51. In fact the Fibonacci retracements can be applied to any security in any market and on any timeframe. Is this the Holy Grail of trading systems – No! They do not guarantee a price move or in what direction but it is clear that the rhythm of nature is alive and well in the market. Trade’m well.

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

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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