Active-Trader - Questions on Fib Lines

Welcome back Active Traders.

Last weekend I got the Fib Lines indicator working under Thinkscript under TOS. I have some more work to do before I can make those available to members of my yahoo group.  But to whet your appetite, this screen shot shows the complete fire and tree line levels for QQQ and you can clearly see the beginning of Wave 1 at 24.98 and the end at 50.60. Recall that the remainder of the lines can all be calculated once those 2 values are determined.

Blog reader Jay posted some questions about the Fib Lines shown here and how they related to screen shots from free videos posted by John Carter as part of Simpler Options web site.  I thought it would be a good opportunity to address those questions and talk a bit about the steps used to determine the lines.

When I first started calculating the Fib Lines, I compared my levels versus those from the Carter videos with the belief that the levels had to be "right". In some cases (such as NFLX) my values matched Carter's within a point or 2.  In other cases (such as QQQ shown above), I could not come up with levels which match Carter's.  But in the end it doesn't matter.  What matters is how well the levels correspond to price behavior.

In the process of working on the indicator, I determined the levels for about 135 stocks, the major ETF's plus the Dow 30 and most of the Nasdaq 100. I got into a type of rhythm where in many cases in under 1 minute I could find levels which worked perfectly.  For an example of levels which work, check out this chart of MMM.

The skeptic in you might say - this is "classic" technical analysis, show me the cases which work and ignore all those which do not!  And you might be right - but keep in mind that the Fib Lines are not a Holy Grail, just one more clue into unlock the mystery of what underlies price action.

Finally to address the last part of Jay's question - why might the levels need to be re-calculated over time?

Recall that Elliot Wave analysis is based on an idealized price move - 5 waves up and 3 waves down.  In that model, at the bottom left of the chart, pessimism is at its maximum, and there are few buyers.  As the move develops, more buyers come in, and the price action follow the idealized model (more or less) with fibonacci levels and relationships being demonstrated by overall crowd behavior.  At the end of the sequence, the pessimists are once again in control and a new low in price is formed.

Once the 5-wave sequence has completed, the original predictive power of wave 1 is over, and a new cycle begins and perhaps a new identifiable Elliot wave 1.  And since the Fib Lines are based on the beginning, end and magnitude of Elliot Wave 1, the Fib lines would need to be re-calculated.  In many symbols I reviewed, those lows occurred at the depths of the financial crisis back in 2008 when many of the symbols I reviewed put in their wave 1 lows.

Other times, prices reach the end of the sequence (423.6% level) and exceed that price.  How do we handle that situation?  Based on the opinion of the analyst, it might be required to move out to a higher time frame a consider the original extend of wave 1 to be too small, and chose a beginning and end of wave 1 based on a larger time frame.  We had to do this recently in Facebook because I think - over the long haul - those prices are going much higher.  Recall that Elliot Wave is an art, and not a science and requires human intervention.  And therein lies the magic.

Have a great week ahead and good trading.