LVS & AUY - Fibonacci Retracements

Some of you may have heard from the Fibonacci Retracement levels and the Golden Ratio 1.61.8. Here is a little historic background:

"In the 12th century, Leonardo Fibonacci discovered a simple numerical series that is the foundation for an incredible mathematical relationship behind phi.

Starting with 0 and 1, each new number in the series is simply the sum of the two before it.

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, . . .

The ratio of each successive pair of numbers in the series approximates phi (1.618. . .) , as 5 divided by 3 is 1.666..., and 8 divided by 5 is 1.60.

The table below shows how the ratios of the successive numbers in the Fibonacci series quickly converge on Phi. After the 40th number in the series, the ratio is accurate to 15 decimal places.

1.618033988749895 . . ."

Source: http://goldennumber.net/fibonser.htm


"Fibonacci retracement levels refers to the likelihood that a financial asset's price will retrace a large portion of an original move and find support or resistance at the key Fibonacci levels before it continues in the original direction. These levels are created by drawing a trendline between two extreme points and then dividing the vertical distance by the key Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8% and 100%."

Source: http://www.investopedia.com/ask/answers/05/FibonacciRetracement.asp

Note: Some people even use an additional retracement level at 76.4%.


Although I haven't looked too much into the Fibonacci Retracement levels, after looking more into it I think it shouldn't be ignored, as the Fibonacci Retracement tool, seem to be time and time again able to predict critical support and resistance level. There is no explanation for as to why it works, but this is something we don't have to worry about, if it helps us make more accurate decisions when we trade, that's all that matters. You can read a lot more about the Fibonacci sequence, by simply googling it, it's very interesting.

Here is two stocks (LVS & AUY) for which I traced the Fibonnacci Retracement levels, which is very intriguing, as it does indeed manage to predict retracement levels. It's not perfectly accurate, but very useful nonetheless. I will pay more attention about Fibonacci Retracement levels in my future analysis.

LVS

To use this tool, you would have to take the current two extreme points (low and high) from a chart. For example, if we take LVS's chart, the most recent high is at $20.73 and the recent low at $6.32, you would do $20.94-$6.32=$14.62 and multiply by the ratio. So for the first ratio of 23.6%, we would do $14.62 x 0.236= 3.45, $20.94 - $3.45= $17.49 (23.6% retracement level); The same would be done for the 38.2%, 50%, 61.8%, and 100% retracement levels. Luckily for us, www.stockcharts.com as many other websites have a fibonacci tool that allows us to automatically draw the retracement levels, without having to do the calculations manually. However, I ignore why in www.stockcharts.com the 23.6% and 76.4% retracement level are not drawn, and that's why I manually calculated and drew them myself.


So according to the Fibonacci retracement levels, or simply drawing a resistance level, since LVS crossed the 38.2% and 23.6% levels at $15.36 and $17.49 respectively, the next resistance level is around $20.94. A move above $20.94, would mean that LVS would have the strong potential of achieving a price target as high as $24.39 (+16.47% - at 23.6% level) ($20.94-$6.32= $14.62 x 0.236= $3.45, $20.94+$3.45= $24.39) and $26.52 (+26.64% - at 38.2% level) ($20.94-$6.32= $14.62 x 0.382= $5.58, $20.94+$5.58= $26.52).

Price Targets after a move over $20.94: $24.39(+16.47% - at 23.6% level); $26.52 (+26.64% - at 38.2% level)


AUY

Price Targets after a move over $12.42: $13.41 (+7.97% - at 23.6% level); $14.02 (+12.88% - at 38.2% level)

To test if Fibonacci indeed predicts support and resistance levels, I have made a test where I took AUY's $8.40 low and the high of $11.53, which has already been crossed to see if it managed to predict AUY's current resistance level around between $12.20 and $12.40. To my amazement, it did actually predict a move to $12.26 using the 23.6% retracement level. Fibonacci has almost exactly predicted the last high closing price, which was actually $12.24 on Thursday (it did go as high as $12.42 during that trading day). Using these low and highs, AUY would give us $12.73 as our next level once AUY closed above $12.26.


Although it is true that we could take different low and highs and perhaps obtain different price targets, it is for us to judge what lows and highs would be the best choices based on the current situation. The more short term you want look at things, the most recent highs and lows should be used within a limited time period. The opposite is also true, if you are long term investor you would probably use a weekly chart using the high and lows of the last few years to predict where it will be heading in the longer term. A day trader may use Fibonacci retracement levels to predict support and resistance levels for the day itself. Basically Fibonacci is customizable based on what time period and type of investor or trader you are.