Wayne Gorman

(1)

Identify Turning Points

Using

F

Fib

ib

o

na

cc

i

By By

Part 2

(2)

How You Can Identify Turning Points Using Fibonacci

Part 2:

How T

o Use

Fibona

cci Relationshi

ps T

o Set

Trading Strategy

By Wayne Gorman, Elliott Wave International

Chapter 1 - Fibonacci Analysis of Cocoa

Using cocoa’s price chart to show how to nd turning points with detailed Fibonacci retracement

analysis

Chapter 2 - Fibonacci Analysis of Starbucks Corporation

A review of

A review of Starbucks’ Fibonacci relationships and turning pointsStarbucks’ Fibonacci relationships and turning points

Chapter 3 - Fibonacci Analysis of Euro/U.S. Dollar Foreign Exchange

Reviewing the Euro/USD price chart for Fibonacci relationships and turning points

Chapter 4

Chapter 4 - - Questions and Questions and AnswersAnswers

A f

A few questions from the Fibonacci webinar participantsew questions from the Fibonacci webinar participants

Introduction:

W

Welcome to thelcome to the second pae second part of Elliott Wrt of Elliott Wave Internave International’s eBook, “Hational’s eBook, “How Yow You Can Ideou Can Identify Turning Pointsntify Turning Points

Using Fibonacci,” which discusses how to

Using Fibonacci,” which discusses how to use Fibonacci relationships to set trading use Fibonacci relationships to set trading strategy.strategy.In this course,In this course,

we will cover three different trading scenarios. The first will be in cocoa futures, then we will look at Starbucks

Corporation, and finally we will discuss the Euro ag

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Identifying Structure

Note

Note: The Cocoa : The Cocoa analysis beginning withanalysis beginning withFigure 1Figure 1 starts on Slide 4 of Wayne Gorman’s Online Trading starts on Slide 4 of Wayne Gorman’s Online Trading

Course, “How You Can Identify Turning Points Using Fibonacci — Part 2.”

Figure 1

Let’s star

Let’s start our detailed Fibonacct our detailed Fibonacci analysisi analysis

with a situation in cocoa. This is a

with a situation in cocoa. This is a dailydaily

continuation chart of the cocoa futures

contract traded on the New York Board

of Trade. We are going to start trading

at the end of the graph o

at the end of the graph on the right. Thatn the right. That

is May 24, 2001. We are going to put

our rst trade on, right at the opening of

this market. Before we start trading, we

should put some wave labels on here.

Figure 2

W

We are starting right from the e are starting right from the major lowmajor low

at the left of the graph. That major low

occurred on December 12, 2000, and is

674. W

674. We can count an impulse wae can count an impulse wave fromve from

that low; there are waves 1, 2, 3, 4 and

5 in red for the Intermediate wave (1).

Now

Now, , we we are are in in wave wave (2) (2) to to the the downside.downside.

We see a ve-wave impulse wave:

6

,,

7

,,

8

,,

9

and and

0

for wave A; then there for wave A; then there

is another corrective structure —

a

,,

b

and

c

— for wave B. — for wave B.

So, what do we

So, what do we have here? We have vehave here? We have ve

waves down. The B wave in red is an

expanded at, because wave

b

goes goes

bey

beyond ond the the starstart t ofof

a

, and wave, and wave

c

goes beyond the end of

a

. We basically. We basically

have a 5-3 structure, so far. What does

that sound like to you? A zigzag, right?

Zigzags are 5-3-5. We want to determine

how far it has to

how far it has to go to the go to the downside. Tdownside. Too

be

be sure, sure, we we are are going going to to check check a a fewfew

things, because it may not be totally clear

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Fibonacci Retracement Analysis

Figure 3

Before we do that, let’s get our bearings and see how far we ha

Before we do that, let’s get our bearings and see how far we have come down. I am ve come down. I am doing a Fibonacci retracedoing a Fibonacci retrace-

-ment analysis using this table. I am going from the low of 674 up to the high of 1202 and seeing how much

ment analysis using this table. I am going from the low of 674 up to the high of 1202 and seeing how much

we have retraced so far. Look at

the end of wave A in red. Wave

A almost makes a 50 percent

A almost makes a 50 percent rere-

-tracement. The

tracement. The

b

wave within wave within

wave B goes a little bit lower.

The A wave comes in at 949,

and the

b

wave is at 945, a few wave is at 945, a few

ticks lower. So, we have done

50 percent, which is certainly

viable. But what do we know

about second waves? Second

waves make deep retracements.

Therefore, we may want to look

for something like 876, which

is the .618 retracement of wave

(1). We do have room to come

down if this is, in fact, going

to be a 5-3-5 zigzag. We could

come down to 876. We may

even come down to 787. We

have to analyze it further, but,

for now, we will keep this 876

in mind, in terms of setting price

targets.

What about at the end of the

graph, though? Can we be sure

that the wave or all of wave B is

over? We do not know.

Figure 4

Here, I am looking at how far

wave B has traveled In terms of

retracing wave A. Look at the

second red dotted line down.

We see that wave

c

or wave B or wave B

basically

basically has has completed completed a a .618.618

retracement of wa

retracement of wave A. That imve A. That im-

-mediately tells us that there is a

mediately tells us that there is a

good chance that wave

c

has has

nished (which means wave B

(5)

wave

c

correctly. That is possible, but we have some proof here correctly. That is possible, but we have some proof here that wave B has that wave B has most likely ended. There ismost likely ended. There is

a bit of a risk he

a bit of a risk here. What happens after the termination of are. What happens after the termination of an ending diagonal? A swift major reversal occurs.n ending diagonal? A swift major reversal occurs.

So, we are not

So, we are not going to have mucgoing to have much time to decide. We have to be careful if we h time to decide. We have to be careful if we saysay, “W, “Well, let’s wait a few daysell, let’s wait a few days

and see what happens.” We may miss a big move, and we

and see what happens.” We may miss a big move, and we do have that .618 do have that .618 retracement.retracement.

Fibonacci Relationships

Figure 5

We can also look at the length

of wave

c

relative to wave relative to wave

a

from a Fibonacci perspective.

We start at point R, which is

the beginning of wave

a

. We. We

end at the letter S, which is the

end of wave

a

. Then we are. Then we are

extending from point T, which

is the start of wave

c

or the or the

end of wave

b

. W. We are e are lookinglooking

at some Fibonacci multiples or

relationships.

We know that a common rela

We know that a common rela-

-tionship is for wave

tionship is for wave

c

to equal to equal

wave

a

; that is what the 1.000; that is what the 1.000

means on the chart below 1084.

Equality with wave

a

comes in comes in

at 1084, and we have gone be

at 1084, and we have gone be-

-yond that. The top of wave

yond that. The top of wave

c

isis

1109. W

1109. We also kne also know that withinow that within

an expanded at, it is common

for wave C to equal 1.618 multiplied by the length of wave A. Well, if that were the case, we would be up at

1170. That is way beyond the .618 retracement. The .618 is at the second dotted line down on the previous

chart. 1170 is even beyond the .786 retracement. So, if

c

is going to be equal to 1.618 multiplied by the is going to be equal to 1.618 multiplied by the

length of wave

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Figure 6

At this stage and with all things

considered, if this is an end

considered, if this is an end-

-ing diagonal, we want to act

ing diagonal, we want to act

quickly. I think we have good

enough evidence to tell us that

wave

c

(and therefore wave B) (and therefore wave B)

has probably ended, and we are

heading down in Minor wave C

of Intermediate wave (2). So, we

are going to go short.

The last tick on the right is the

open at 1076, and we do not

want to go past the top of wave

c

. Wave. Wave

c

of B ends at 1109. of B ends at 1109.

So, we are going to set our stop

at 1110, just one tick above that.

We really would not want to

see further price action above

1109. Theref

1109. Therefore, we have ore, we have a tighta tight

stop. stop.

Price Targets

Figure 7 Figure 7 Now,

Now, with with the the availabavailable le priceprice

data, we want to set some price

targets and, hopefully, a time

target. Let’s go back now and

see that retracement here. Re

see that retracement here. Re-

-member, we said that the .618

member, we said that the .618

retracement of wave (1) comes

in at 876. That is one point we

can look at for a projection.

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What is the other thing that we

can do

can do using Fibonacci relationusing Fibonacci relation-

-ships? W

ships? We can e can look at the look at the lengthlength

of wave A in red. We are going

from point R, the beginning of

wave A, to point S, the end of

wave A. Then we are going to

extend multiples of that length

from point T, which is the end

of wave B in red. This gives

us estimates for wave C within

wave (2). Remember, we are

looking for more than one point

that might be close.

that might be close. Right now,Right now,

the only target point we have is

876 to the downside. Look at the

1.000 mark. That means it is a

1-to-1 relationship, and it comes

in at 856. If wave C equals wave

A, it would end at 856. If wave

C is 1.618 multiplied by the

C is 1.618 multiplied by the length of wave A, it would end down at length of wave A, it would end down at 700; that would be a 700; that would be a fairly deep retracefairly deep retrace-

-ment. Y

ment. Yet 856 is somewhat et 856 is somewhat close to the 876close to the 876. So, we . So, we have a couple have a couple of good points. Again, right now, we are justof good points. Again, right now, we are just

looking for a general target or something to a

looking for a general target or something to aim for as this price move for Cocoa im for as this price move for Cocoa unfolds to the downside.unfolds to the downside.

Figure 9

I now have this Fibonacci clus

I now have this Fibonacci clus-

-ter. Wave (2) retraces .618 of

ter. Wave (2) retraces .618 of

wave (1) at 876,

wave (1) at 876, and C equals Aand C equals A

at 856. Remember, we are look

at 856. Remember, we are look -

-ing for wave C in red to come

ing for wave C in red to come

down to complete wave (2).

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Figure 10

W

We are short at 1076 e are short at 1076 and have aand have a

stop at 1110. For a price target,

we will shoot for 856 for now,

because

because C C equals A is equals A is a a strongstrong

relationship. W

relationship. We e certainly couldcertainly could

use 876 or a range of 876 to 856;

we will ne-tune this price

ob- jective as we go forward.

jective as we go forward.

Figure 11

On this chart, I have moved

ahead several days in time, and

you can see that we are breaking

out to the downside. Notice that

I have marked our potential risk

and potential reward. Given our

stop at 1110 from the 1076

stop at 1110 from the 1076 startstart

point

point and and our our projected projected targettarget

of 856, our potential risk is 34

points and our potential reward

is 220 points. So, we have a very

good risk-to-reward ratio, and

we have already come down.

(9)

Let’s now analyze this move

down. I put some wave labels

on here. We can count the waves

within wave C as

6

,,

7

,,

8

,,

9

and possibly

0

, or maybe, or maybe

8

ends at the bottom right. It is

debatable. It’s possible that at

the start of wave C, there is a

small

6

--

7

. In both cases, there. In both cases, there

are three waves; we either have

three waves down to the second

to last low or to the very last low

on the right.

Can we get out of the position

here? Certainly we can. At the

second to last low, we are down

to 914. At the last low, the level

is 897. So, we certainly have a

decent prot. However, at these

levels – 897 and 914

levels – 897 and 914 – we do not even – we do not even achieve parity with wave A. In other words, if we are going to take achieve parity with wave A. In other words, if we are going to take thethe

view that wave C has ended, then wave C would be less than wave A in terms of length. It would be approxi

view that wave C has ended, then wave C would be less than wave A in terms of length. It would be approxi-

-mately equal to 80 percent of wave A. We want to stay in this position. Remember, we still see the potential

mately equal to 80 percent of wave A. We want to stay in this position. Remember, we still see the potential

for 856 or 876. Instead of

for 856 or 876. Instead of just getting out, we can bring just getting out, we can bring our stop down and still shoot for the our stop down and still shoot for the target of 856.target of 856.

Now that we have more price information from waves

6

through through

8

, we can start to calculate additional Fi, we can start to calculate additional Fi-

- bonacci points, right? We can look at

bonacci points, right? We can look at the distance of the distance of waveswaves

6

through through

8

and try to project wave and try to project wave

0

within within

wave C. We can also make some

Fibonacci time projections. But

first matters first. We really

should adjust our stop level.

Adjusting Stop Level

Figure 13

Assuming for now that the sec

Assuming for now that the sec-

-ond to last low is wave

ond to last low is wave

8

within within

C, we are looking at a Fibonacci

retracement of wave

8

. We do. We do

not want to have the price action

go much above a .618 retrace

go much above a .618 retrace-

-ment, though, because that

ment, though, because that

probably

(10)

1024. This way, we will hold onto the position and see what happens. Unless we get a bad ll, we know that

we really have no

we really have no more risk. Wmore risk. We do have e do have opportunity loss: if the market moves up opportunity loss: if the market moves up to 1026, that is ceto 1026, that is certainly artainly a

lost opportunity

lost opportunity, but not an o, but not an outright loss. So, with the stop at 1026 utright loss. So, with the stop at 1026 now, we are going to hang in there, benow, we are going to hang in there, becausecause

there is strong evidence that we can go down even more.

Figure 14

We have moved ahead several

days. Now it looks like wave

8

ends at the ends at the last lowlast low. The next. The next

high could be

9

, and the fol, and the fol-

-lowing low could be

lowing low could be

0

.Then,.Then,

maybe it is over, but we still

have not even reached parity.

The lowest low to the right is

880. That still does not give us

parity with wave A

parity with wave A. At 880, we. At 880, we

are about 90 percent the length

of wave A. It is still possible that

we can stay in and watch the

price

price go go down down furthfurther er to to that that 856856

level, or we can get out here. But

again, we can just keep lowering

our stop. There is no need to exit

too qu

too quicklyickly..

Figure 15

On this chart, we have moved

our wave

8

label down. I think label down. I think

that maybe the next rise can

be

be a a wavwavee

9

expanded flat. expanded flat.

Possibly. Let’s move ahead

a few days now that we have

moved wave

(11)

W

We see now that we have see now that we have movede moved

up substantially. The top level at

the right is 1000 even. Notice

what happens next: We gap

down from there. Maybe this

price move is going up.

price move is going up. MaybeMaybe

the move is over. Just look at the

whole wave (2). It is not what

you call very sharp, but again,

we can adjust our stop. This is

not the best looking

9

. Look. Look

at how small the

7

is, and this is, and this

9

is a bit large. It is awkward- is a bit large. It is

awkward-looking to be a wave

looking to be a wave

9

, but it, but it

does have the cha

does have the characteristics ofracteristics of

a corrective structure. We will

put a

9

up there at the top for up there at the top for

now just to give us a reference

point.

Figure 17

If we are going to hold on here,

we want to bring our stop down

even more. Look at the .618

retracement of wave

8

– that – that

comes out at 1018. So, we are

going to move our stop down to

1019. Remember, we are short

at 1076 and would not want to

see a move above this 1018.

We are going to take a stand

here. We see that we are gap

here. We see that we are gap-

- pi

ping ng dodownwn. . ThTherere e is is a a gogoodod

chance that maybe we are com

chance that maybe we are com-

-ing down in wave

ing down in wave

0

. We have. We have

some valuable information here

with waves

6

,,

7

,,

8

and and

9

of of

wave C in red. Next, we

wave C in red. Next, we will dowill do

some more Fibonacci analysis

and see if it coincides with that

856 and 876. We can also do

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Continued Fibonacci Analysis

Figure 18

Let’s look at the whole move of

developing wave C by starting with

the net distance traveled of waves

6

through through

8

. In other words,. In other words,

6

is at my is at my

starting point R, and point S is the

end of wave

8

. Then, we are going. Then, we are going

to what I think is the end of wave

9

, which is point T. We can now, which is point T. We can now

project

project downward downward some some FibonacciFibonacci

relationshi

relationships for ps for wavewave

0

, and that, and that

is what this diagram shows you.

That .618 – 869 in blue is saying

that if wave

0

goes down to 869, it goes down to 869, it

will be equal to

will be equal to .618 multiplied by.618 multiplied by

the net distance traveled of waves

6

through through

8

. If wave. If wave

0

goes goes

down to 788, it will be on parity

with waves

6

through through

8

. If wave. If wave

0

is 1.618 multiplied by the length is 1.618 multiplied by the length

of waves

6

through through

8

– of course, – of course,

that would be an extension – we

will be down at 657. That does

not work; we can eliminate that

option because it goes below 674.

In Elliott wave analysis, wave (2)

cannot go beyond the start of wave

(1). Even the 788 is way past our

856 target. But we are going to take

note of the 8

note of the 869 level. We will build69 level. We will build

on our Fibonacci price cluster, be

on our Fibonacci price cluster, be-

-cause now

cause now, , besides 856 besides 856 and and 876,876,

we also have 869. Let’s look for

some more relationships here, all

based

based on on the the assumptiassumption on that that wavewave

9

ends at the top right. ends at the top right.

Figure 19

Let’s look at some Fibonacci dividers. We are looking at how wave

9

divides waves divides waves

6

through through

0

. Look. Look

down at the 824: if wave

0

ends at 824, then the entire length from 1109 to 824 is equal to 2.618 multiplied ends at 824, then the entire length from 1109 to 824 is equal to 2.618 multiplied

by the

by the length from 1109 length from 1109 to 1000. to 1000. So in So in other words, if other words, if the distance the distance from 1109 to 10from 1109 to 1000 is 1 00 is 1 (the net d(the net distanceistance

traveled of

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That is the same as saying that

the end of wave

9

creates the creates the

Golden Section. If the entire

length is 2.618 of the length

from 1109 to 1000, that means

that the length in red is .618 of

the whole (1.618 over 2.618 is

.618), and the length in blue is

.382 of the whole (1 over 2.618

is .382), which means that the

lower section is .618, and the

upper section is .382. So, we

have another Fibonacci point. If

wave

0

of wave C of wave (2) of wave C of wave (2)

ends at 824, it forms a perfect

Golden Section.

Figure 21

We have a decent Fibonacci

price

price clustercluster, t, thanks thanks to our o our analanal-

-ysis i

ysis in which n which we we were lookingwere looking

for wave

0

of wave C of wave of wave C of wave

(2). Wave (2) retraces .618 of

wave (1) at 876. C equals A at

856.

0

of C equals .618 multi of C equals .618 multi-

- plied

plied by by the the net net distadistance nce travetraveledled

of waves

6

through through

8

at 869. at 869.

W

We see that the e see that the end of waveend of wave

9

of wave C forms that “GS,” or

Golden Section; there is a .382

on the upper section and a .618

on the lower section, if wave

0

ends at 824. So, we have a ends at 824. So, we have a

whole cluster of points that we

can

(14)

Figure 22

What about the price target

then? I have made it a range of

somewhere around 856 to 824.

I have given up on the 876, be

I have given up on the 876, be-

-cause I think that it is possible

cause I think that it is possible

to go a

to go a little bit further than that.little bit further than that.

But we will keep everything in

mind. mind.

Time Targets

Figure 23 Figure 23 Now

Now, let’s look , let’s look at time at time targets.targets.

We want to do some Fibonacci

analysis with respect to time

on this C

on this C wave. Wwave. We are startinge are starting

right at the beginning of wave

6

of C. At the bottom, the num of C. At the bottom, the num-

- bers

bers in in blue blue are are all all FibonaFibonaccicci

numbers. Do you see the 5, 8,

13, 21, and 34? If the entire C

wave lasts 34 days, it will end

on Friday, July 6, 2001. The last

piece of price d

piece of price data is from Julyata is from July

3. The high at the end of wave

9

is July 2, and then we have is July 2, and then we have

the point on July 3. This

the point on July 3. This is tellis tell-

-ing us that there is a possibility

ing us that there is a possibility

that the whole move may end

on July 6. That really is just a

couple of days

(15)

Let’s look at some other rela

Let’s look at some other rela-

-tionships. Now here, we are

tionships. Now here, we are

looking to see if we can identify

a Golden Section with respect

to time. We start at the begin

to time. We start at the begin-

-ning of wave

ning of wave

6

of wave C and of wave C and

extend this forward. We want

to see if either the end of wave

9

or the beginning of wave or the beginning of wave

9

creates a Golden Section. creates a Golden Section.

The .618 red dotted

The .618 red dotted line tells usline tells us

that the end of wave

9

forms forms

a Golden Section – .618 for the

rst time section and .382 for

the second – if this entire move

ends on July 26, 2001. So, that

is one point. That is pretty far

out in time, since we are only

at July 3, but we can keep that

point in mind.

Figure 25

Now

Now here here is is another another one. one. InsteInsteadad

of looking at the end of wave

9

, we are looking at the en, we are looking at the end ofd of

wave

8

, which is the beginning, which is the beginning

of wave

9

. W. We are looke are looking for aing for a

Golden Section with respect to

time. Notice the .382. If the C

wave ends on July 10 – or wave

0

of C ends on July 10 – the e of C ends on July 10 – the endnd

of wave

8

or the beginning of or the beginning of

wave

9

will divide the whole will divide the whole

time frame into .382 and .618.

So, here is another date, July 10,

to keep in our memory besides

July 6.

(16)

Figure 26

Now

Now, , let’let’s s try try a a Fibonacci Fibonacci extenexten-

-sion. We look at the total time

sion. We look at the total time

from the beginning of wave

6

to the end of wave

8

. Then, we. Then, we

extend from wave

9

. We are. We are

looking at .382, .618 and even

1.618. In terms of time, if wave

0

is equal to .382 multiplied is equal to .382 multiplied

by

by the the net net distance distance traveled traveled ofof

waves

6

through through

8

, we get an, we get an

end point of July 9. If wave

0

is equal to .618 multiplied by the

net distance traveled of waves

6

through through

8

, we get July 13., we get July 13.

Now

Now we we are are startstarting ing to to get get aa

Fibonacci time

Fibonacci time clustercluster..

Figure 27

To sum up our Fibonacci time

targets: W

targets: We can e can see that the see that the endend

of wave

8

of C forms a Golden of C forms a Golden

Section if

0

ends on July 10. In ends on July 10. In

C, .382 multiplied by

6

through through

8

from the end of from the end of

9

gives us gives us

July 9 for the end of

0

. In C,. In C,

.618 multiplied by

6

through through

8

from the end of from the end of

9

gives us gives us

July 13. Remember, these are all

with respect to time, not price.

(17)

So now we have both a good

price

price cluster cluster and and a a good good timetime

cluster for Cocoa, which I have

summarized here. Here are our

prices

prices: : WWe e are are looking looking for for 856 856 toto

824. Now we have a

824. Now we have a time targettime target

–

– July July 9 9 to to July July 13. 13. I I left left out out JulyJuly

6 because it seems to be a little

too soon. By the way, these are

trading days, not calendar days.

When we are analyzing time on

a daily bar chart or less, we are

looking at the actual bars; so, we

are always looking at the trading

days. Whereas at higher time

frames, if we are looking at a

weekly or monthly, we are look

weekly or monthly, we are look -

-ing at the actual weeks, because

ing at the actual weeks, because

we do not have trading weeks.

So, we have to have a bit of tolerance of the plus or minus one day, because we don’t calculate fractions of

days. These estimates – .618, .382 – are always whole numbers. I am not putting up fractions of days. So we

could be o

could be off plus or minus one ff plus or minus one day. Wday. We have e have to consider that as to consider that as well.well.

Conclusion

Figure 29

Before we move ahead in time,

what other analysis can we

do? Let’s not forget some of

our Elliott wave guidelines.

Remember, this wave (2) is a

zigzag

zigzag, so we can draw a trend, so we can draw a trend

channel (the blue lines) that

contains the zigzag. We can

also channel an impulse wave

for wave C with green lines.

Notice

Notice that that these these two two channelschannels

intersect at about the 825 level.

The bottom of these channels is

certainly within our price-target

range.

(18)

Figure 30

The red box I’ve drawn takes

into account both our price and

time targets. So, we are going to

look now for this wave C move

to come into that box or close

to come into that box or close toto

that box, and

that box, and that is where wethat is where we

are going to get out

are going to get out ..

Figure 31

So, here’s the chart showing

how Cocoa’s price moved in the

next few days.

next few days. WWe are gappinge are gapping

down. Notice that the price ac

down. Notice that the price ac-

-tion comes into our target area,

tion comes into our target area,

meeting our price and time tar

meeting our price and time tar -

-gets. The exact day in the box

gets. The exact day in the box

is July 10. The low of July 10

right now is 854. The range is

from 880 to 854. We have come

a little bit past the 856, so we

are going to get out. There is

no other reason to stay in at this

point,

point, and and with with a a fast-movingfast-moving

market, it is probably best to

get out. We will get out in the

middle of the range between

880 and 854.

(19)

The middle comes out to 867,

and we end up with a prot of

209 points.

Figure 33

Look what happened next. The

low after wave

9

does turn out does turn out

to be wave

0

of C of (2), and of C of (2), and

we do get a major reversal. As

a matter of fact, cocoa goes up

substantially into the start of

Intermediate wave (3).

(20)

Identifying Structure

Note

Note: The Starbucks analysis beginning with: The Starbucks analysis beginning with Figure 34Figure 34 starts on Slide 40 of Wayne Gorman’s Online starts on Slide 40 of Wayne Gorman’s Online

Trading Course, “How Y

Trading Course, “How You Can Identify Turning Points Using ou Can Identify Turning Points Using Fibonacci — Part Fibonacci — Part 2.”2.”

Now let’s move on

Now let’s move on to a to a situation insituation in

Starbucks that took place back in

2006.

Figure 34

Here is a chart of Starbucks from the

middle of 2004 up through almost

the end of 2006. The end of the

graph on the far right is the week of

November

November 3, 3, and and that that is is when when we we areare

going to start

going to start trading. Let’trading. Let’s put somes put some

wave labels on this chart.

Figure 35

There is a big upturn here. Our con

There is a big upturn here. Our con-

-cern, of course, is really toward the

cern, of course, is really toward the

end of the chart, but we can label the

waves (3) and (4), and then waves

waves (3) and (4), and then waves 1,1,

2, 3, and 4

2, 3, and 4 in red. That is certainly anin red. That is certainly an

unusually deep wave 4, but the

unusually deep wave 4, but the movemove

off of it looks impulsive and there

is no overlap. W

is no overlap. Wave 4 in red ave 4 in red ends atends at

28.72, and the wave 1 high in red is

28.45. We are going to look at the

rise after wave 4 on a daily chart, and

we will see that we have an impulse

type of structure. But

type of structure. But rst, let’s stayrst, let’s stay

with the big picture. Wave 3 ends

at $39.88 per share on Starbucks.

The next high after wave 4 is 39.50.

These are important prices.

(21)

Figure 36

Let’s now do some Fibonacci

analysis here on the weekly chart.

We are looking to go long at the

end of this graph to capture the

end of wave 5 in red. We want

to basically capture that upward

move. If we go from the begin

move. If we go from the begin-

-ning of wave 1 at point R to the

ning of wave 1 at point R to the

end of wave 3 at point S, we are

looking at the net distance trav

looking at the net distance trav-

-eled of waves 1 through 3. If wave

eled of waves 1 through 3. If wave

5 equals .618 multiplied by waves

1 through 3, what is our target?

That comes out to 39.59. That

poses a

poses a little little bit of bit of a problem, a problem, bebe-

-cause wave 3 ends at 39.88. This

cause wave 3 ends at 39.88. This

project

projection ion is is tellintelling g us us that that wave wave 55

might be truncated. We have been

on a long-term up-move for quite

a while. And 39.59 does go above

the high on the far right, which

is 39.50, but only by 9 cents. So

we are not going to put too much

weight on this number, but we

will keep it in mind.

Figure 37

What about a Golden Section?

Not

Notice ice thethese se dodottetted d blublue e linlineses

here. W

here. We are lookine are looking at how waveg at how wave

4 divides the entire move – waves

1 through 5 – into the Golden

Section. .382 is the rst section

and .618 is the second. At 39.12,

there is a Golden Section, because

if the whole move is 2.618 of the

length from 28.72 to 22.29, that

comes out to 39.12. That is even

more of a truncated wave, which

(22)

Fibonacci Analysis on the Daily Bar Chart

Figure 38

So now we are looking at the

So now we are looking at the daily bardaily bar

chart of Starbucks. Notice wave 4 in

red that we were

red that we were looking at before. Welooking at before. We

want to do some Fibonacci analysis

based on t

based on the daily charthe daily chart, but , but let’let’s rsts rst

put some wave labels on.

Starting from the low at wave 4 in red,

we can label waves

6

,,

7

,,

8

and and

9

in blue. I put in the subdivisions of

wave

8

so that you can get an so that you can get an idea ofidea of

how I arrived at this wave

8

. W. We havee have

(i), (ii), (iii), (iv) and (v) in red. Then

we have wave

9

in blue that looks in blue that looks

like a double zigzag. We have a gap

in wave (v) in red that we have to be

concerned about. Now we are looking

for wave

0

of 5 to the upside. of 5 to the upside.

So, let’s analyze this. The high at the

end of wave

8

in blue is 39.50. We in blue is 39.50. We

do not know if wave

9

in blue is in blue is

over yet. Let’s not jump ahead too

much. That low in wave

9

is 36.22 is 36.22

on November 3

on November 3. W. We will start tradinge will start trading

on November 3, and we are looking

to go long. However, we rst want

to determine how we are going set a

stop. What is our stop going to be and

is wave

9

over? over?

Price Targets

Figure 39

Let’s look at some price projections

here. Wave

0

in blue will end up in blue will end up

somewhere around the top right of the

chart. How do we get that number?

First, we look at the distance of wave

6

in blue – from point R to point S. If wave in blue – from point R to point S. If wave

0

is going to equal wave is going to equal wave

6

, we add that distance onto the end, we add that distance onto the end

of wave

9

, and we get 38.71. Well, that is even below those other 39 levels. Why are we looking at parity?, and we get 38.71. Well, that is even below those other 39 levels. Why are we looking at parity?

Because wave

8

in blue is extended, and if wave in blue is extended, and if wave

8

is extended, we can usually expect wave is extended, we can usually expect wave

0

to equal to equal

wave

6

. That does not help us h. That does not help us here, though, because 38.71 ere, though, because 38.71 is too low. It is almost telling us that we are goingis too low. It is almost telling us that we are going

to have a truncated fth wave. Maybe we will have to watch for that after all.

(23)

How about this relationship,

then? How about looking from

6

in blue in blue

to the end of wave

8

– point R – point R

to point S? We multiply that by

.382 and add that onto wave

9

..

That gives us a target of 40.34.

In other words, at 40.34, wave

0

equals the net distance trav equals the net distance trav-

-eled of waves

eled of waves

6

through through

8

multiplied by .382. Now we are

getting somewhere. At least that

is higher than 39.50. That seems

to make some sense, so we are

going to take note of it. It is a

possible price target.

Figure 41

Let’s look at the Golden Sec

Let’s look at the Golden Sec-

-tion again but now on this daily

tion again but now on this daily

chart. We are looking at how

the end of wave

9

divides the divides the

entire price movement into .618

for the lower half and .382 for

the upper half. That is the same

as saying that the entire distance

is equal to 1.618 multiplied by

the distance from 36.22 to 28.72.

W

We get a price target of 40.86 – ae get a price target of 40.86 – a

valuable piece of information.

If wave

0

ends at 40.86, then ends at 40.86, then

wave

9

will have divided the will have divided the

entire price movement into the

Golden Section.

(24)

Figure 42

We have a Fibonacci price

cluster now to help us estimate

the end of wave

0

in blue, in blue,

which is completing the wave

5 in red, which is completing

wave (5). What does this tell

us? That we are talking about

a fth of a fth of a fth wave,

so we have to be cautious here.

W

We are approaching e are approaching the end of athe end of a

major move. Maybe we should

not even go long. Maybe we

should just let it play out and go

short, but why don’t we try?

short, but why don’t we try? ItIt

looks like there could be a de

looks like there could be a de-

-cent move. We have Fibonacci

cent move. We have Fibonacci

clusters here with price, so it

may be worth doing.

Let me review:

0

of 5 in red equals .382 multiplied by of 5 in red equals .382 multiplied by

6

through through

8

at 40.34. The end of at 40.34. The end of

9

of 5 in red forms of 5 in red forms

a Golden Section, if

0

ends at 40.86. Wave 5 in red of (5) equals .618 multiplied by the ends at 40.86. Wave 5 in red of (5) equals .618 multiplied by the net distance traveled ofnet distance traveled of

waves 1 through 3 in red at 39.59. Now remember that we can

waves 1 through 3 in red at 39.59. Now remember that we can have a truncation. Whave a truncation. Wave 5 in red can be ave 5 in red can be truncated,truncated,

and wave

0

in blue can be truncated. We will keep that in mind, but we are not going to look in blue can be truncated. We will keep that in mind, but we are not going to look for a truncation.for a truncation.

For a price target, we just look at

For a price target, we just look at the mid-point of 40.34 and 4the mid-point of 40.34 and 40.86; that will give us a target of 40.50.0.86; that will give us a target of 40.50.

Figure 43

On November 3, the low is

36.22 and the high is 37.40; the

middle of that range is 36.80.

So, we are going to go long

at 36.80 with a price target of

40.50 based on that price clus

40.50 based on that price clus-

-ter

ter. W. We should e should exclude the exclude the priceprice

target of 39.50 unless we see

more evidence that there will be

a truncated fth wave.

(25)

Figure 44

Now

Now, , I I want want to to go go back back to to thethe

weekly chart and examine some

time relations. The numbers –

87, 54, and 44 – are all weeks.

Notice the .618 red

Notice the .618 red dotted line.dotted line.

We are looking to see how the

end of wave 3 in red, which is

the same as the beginning of

wave 4, divides the entire time

length for waves 1 through 5 in

red into the

red into the Golden Section. WeGolden Section. We

get an end date of December 22,

2006, which means that if this

entire move ends on December

22, the end of wave 3 will have

divided the entire time duration

into the Golden Section, the

rst section being .618 and the

second .382. Well, December 22

is pretty far away from Novem

is pretty far away from Novem-

- ber

ber 3, 3, considering considering that that we we areare

looking for a move over about

a week o

a week or two. Yr two. Yet we will stillet we will still

keep it in mind.

Figure 45

In terms of time, we can also

look at waves 1 through 3 and

extend from wave 4. We nd

that .382 times that length is

88 weeks forward (a Fibonacci

89 minus 1), which comes out

to December 29. On the chart

before, December 22 was at

before, December 22 was at 8787

weeks, so December 29 is at 88

weeks.

(26)

Figure 46

Here is one last relationship – a

Fibonacci 89 weeks for waves

1 through 5. That comes out to

January 5, 2007. These are all

pre

pretty tty far far awaaway y in in time time fromfrom

November 3, but

November 3, but we will makewe will make

note of them and see what hap

note of them and see what hap-

- pens.

pens.

Figure 47

Before we go forward with the

trade, there is a time target that

looks more reasonable back on

the daily chart. Look at the Min

the daily chart. Look at the Min-

-ute waves

ute waves

6

,,

7

,,

8

and and

9

in in

blue. I

blue. If f wavewave

0

in blue of wave in blue of wave

5 in red ends on November 15,

then the beginning of wave

9

or the end of wave

8

in blue in blue

will have divided the whole time

duration into a Golden Section.

For now then, we will set

For now then, we will set a timea time

target of November 15, 2006,

because it

because it is the is the only close only close timetime

target we have.