Applying Fibonacci Theorem to Copper Price Movements

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We at MetalMiner are not normally ones to follow the black arts of the Chartists, preferring the supply and demand arguments tempered with a judgment of market sentiment and background macroeconomics to guide our metal price predictions.

But just because we are not huge fans doesn’t mean to say the use of charts to predict future price moves does not have some relevance.

Some funds are based largely on chart predictions and a few do quite well, so when we come across a report from a respected source like Reuters, particularly if it points dramatically in a certain direction we cant help but be intrigued.

Chartists, or technical traders as they are sometimes called, look (in simplistic terms) for wave patterns and analyze wave cycles with reference to how closely they match ratios, and are named after a 13th-century mathematician named Leonardo Fibonacci. Fibonacci discovered a sequence of numbers and, more importantly perhaps, the ratio between the values of adjacent numbers in the sequence.

Quoting from Investopedia for a succinct definition, in the Fibonacci theorem the sequence of numbers starts as follows: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, etc., and goes on to infinity. Each term in this sequence is simply the sum of the two preceding terms, and one of the remarkable characteristics of this numerical sequence is that each number is approximately 1.618 times greater than the preceding number.

This common relationship between every number in the series is the foundation of the common ratios used in retracement studies and the ratio appears both in nature and the performance of stock and metals futures market price movements.

The key Fibonacci ratio of 61.8% – also referred to as “the golden ratio” or “the golden mean” – is found by dividing one number in the series by the number that follows it. For example:

8/13 = 0.6153, and 55/89 = 0.6179, while the 38.2% ratio is found by dividing one number in the series by the number that is found two places to the right.

For example:

55/144 = 0.3819

So how is this used in technical analysis for copper and aluminum prices?

Continued in Part Two.

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