Stocks are the big bargain of the century!? The 61.8% Fibonacci retracement pullback price is.
Hello, this is Geshi Yama.
This is a story from a little while ago, in Bloomberg
'“A once-in-a-lifetime mega bargain,” the world’s ultra-rich are rushing to buy stocks’
I saw such a headline article.
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https://www.bloomberg.co.jp/news/articles/2020-03-20/Q7HKRPDWLU6901
When you see articles like this,some people’s blood may start to boil.
They may think,“If I don’t buy here, when will I?”
On the other hand,
“It’s a buying opportunity!
And because people are saying that,the bottom is still deep,”
is the view of some.
No matter how seriously you think about the future,you cannot know for sure,so
don’t be swayed by such articles
and simply continue trading calmlyaccording to your own trading rules.
That is crucial.
However,humans are weak
and in situations where the future is unclearthey feel fear
and may act irrationally.
In such times,having some kind of reference point
can help stabilize the mind for some peopleas well.
So todaywe will consider a reference price for the NY Dow,
which also has a big impact on the Nikkei Stock Average,and think about a price to use as a reference.
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During the Lehman Brothers collapse, it fell more than 50%
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First,let’s review the NY Dow Jones Industrial Average’s movement(based on closing prices) after Lehman.
The Dow reached14,164.53 dollars on October 9, 2007.
That was the all-time high at the time.
However,it plunged sharply,
and in the year after Lehman,
on March 9, 2009, it stood at6,547.05 dollars.
14,164.53 dollars
↓
6,547.05 dollars
That drop wasabout 53.8%.
Less than half the price—a huge bargain.
If this time also drops about
53.8%, then...
Based on the all-time high of February 12, 2020
29,551.42 dollars
and
calculating from there,it would be about13,653.75 dollars.
If this decline is similar to an Lehman-scale drop,
such a drop would not be surprising.
Back then,
it took about a year and a half to fall more than 50%,
but it may not take that long this time.
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Fibonacci Retracement
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That said,the past is the past,
and the theory that the same movement as Lehman will repeatis simplistic.
Sowe will also introduce
the price levels shown by
technical analysis,the Fibonacci retracement,
which can indicate a potential buying dip.
First of all,
I must mention thatI personally do not trade
using technical analysis on a regular basis.
You can still profit without relying on technical analysis,
so.
However,as mentioned at the beginning,
having a reference price can provide peace of mind for many traders,
so
here, as a reference price
we will introduce the price levels that can be considered as buying dips
derived from
the Fibonacci retracement in technical analysis.
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Calculating the price for buying the dip
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First
about the Fibonacci retracement
I will briefly introduce it.
'Fibonacci'
is a name for a person.
Long ago,there was a mathematician named Fibonacci
an Italianwho lived.
Around 1170 to 1250
it is said he lived,a genius mathematician.
And,named after his namethere is
the Fibonacci ratio.
About Fibonacci ratios
I will not explain in detail here,
if you’re interested,please look it up yourself.
'Fibonacci Retracement'
'Retracement' means 'pullback'.
As you know,stock prices generally move in waves.
Even in an uptrend there are pullbacks,
and in a downtrend there are rallies.
There is no market that continually rises
or continually falls.
So,the target prices of pullbacks within uptrends and rallies within downtrends
calculated using the Fibonacci ratios
are what we call
Fibonacci Retracement.Now,let’scalculate concretely.
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The pullback price indicated by Fibonacci is 14,216 dollars
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In Fibonacci retracement
38.2%,
50%,
61.8%
these levels are commonly used in calculations.
For example,in an uptrend
the distance from low to high is used,
38.2%,
50%,
61.8%
these corresponding price levels may be opportunities to buy the dip.
When calculating Fibonacci,which price to designate as the low and high
will change the result, of course, but
this time we will base the calculation onthe post-Lehman lowest price,
6,547.05 dollars, and
the all-time high of February 12, 2020,
29,551.42 dollars.
(To simplify calculations,the decimals are truncated.)
From 6,547 dollars to 29,551 dollarsthe rise is
23,004 dollars.
Then, while dropping from 29,551 dollars,
we calculate the price levels that would act as pullbacks,
firstfor the 38.2%
38.2%,
50%,
61.8%
the corresponding decline widths are
38.2%: about 8,788 dollars
50%: about 11,502 dollars
61.8%: about 14,216 dollars
yes.
From 29,551 dollars
subtracting each of these numbers
38.2%: 20,763 dollars
50%: 18,049 dollars
61.8%: 15,335 dollars
these are the calculated prices.
At each of these price levels,
from a downtrend, a new uptrend could begin,
or there could be a temporary short-term rebound.
So
what about if the price falls beyond the 61.8% level?
A 76.4% figure is sometimes used,
but that could indicate the uptrend has ended.
However,to emphasize again,
Fibonacci does not tell you everything about the market.
If you thoroughly study all technical analysisand learn it properly,
the story changes a bit, but
if not,do not cling too much to Fibonacci numbers.
Use them as one reference pointand as a guide.
And you should always keep in mind the scenario
where the market moves differently from your expectations.
So please continue watching until the end today as well.
Thank you for reading.
Keizo Shima
