Fibonacci
Some theories of technical analysis are based on the
Fibonacci ratios, the brainchild of Leonardo Fibonacci,
a mathematician who lived in Italy 800 years ago.
According to his findings, a stock market trend is
likely to retrace itself by 61.8, 50 or 38.2 per cent.
The theory is rooted in Fibonacci’s numerical
sequence in which each number equals its two predecessors
added together. The sequence reads 0, 1, 1, 2, 3,
5, 8, 13, etc. The ratio between two successive numbers
in the sequence, barring the first few, is 61.8 per
cent, which is known as the golden mean.
The Elliott Wave theory
The Fibonacci ratios helped to inspire technician
Ralph Nelson Elliott into creating his famous Elliott
Wave theory, which he published in 1939. According
to the theory, market cycles have an impulse wave
of five parts, reaching new highs, which is followed
by a corrective wave of three parts. The waves interrelate
according to various rules, including Fibonacci numbers.
Elliott Wave theory requires some subjective judgement,
and problems arise in assessing where one wave starts
and another finishes. But the framework can be made
to work if the exceptions are excluded. Elliott Wave
has a few fervent supporters but far more detractors.
One enthusiast of the Elliott Wave is former iconoclastic
stock market trader Bob Beckman, who once said that
only three people besides himself understood the theory,
one of whom was dead, and another of whom had forgotten
it.
Beckman’s unnamed third party is likely to have
been Robert Prechter, a world expert on Elliott Wave
theory, who is now linked to the Socioeconomics Foundation,
a think tank that has disseminated his views. The
stock market reflects crowd actions and, when it is
rising, so too the social mood is uplifted, and popular
music and culture become more optimistic, according
to Prechter. When the stock market is down, popular
culture, in his experience, becomes pessimistic.
To explore such ideas further, visit www.socioeconomics.net
for free access via the net to a 56-minute documentary
film which presents interviews with Prechter and his
supporters and with the sceptics, amidst footage of
political speeches and pop culture of recent decades.
