Stocks & Commodities V. 1:4 (70-73): Fibonnacci Cycles by TUCKER J.

EMMETT

Fibonnacci Cycles
by TUCKER J. EMMETT

he growth in popularity of my own technical application of the Fibonnacci mathematical series to the

futures markets the past ten years has been fairly remarkable, considering the amount of homework and
trading discipline requisite in the approach. But the predictive accuracy and logic behind this technical
system, along with the method of checks and balances obtained from it, make the effort well worthwhile.
The Fibonnacci series is the basis of the "Elliot Wave" and various forms of Elliot theory. While Elliot
theory is espoused by many analysts, it is understood by very few. My own application of the Fibonnacci
series evolves from a strict subdivision of the futures market into three distinct categories: Pattern,
Time, and Ratio. I then require that each of these three categories have satisfied the essential framework
of the Fibonnacci series before establishing a position. If only two out of the three categories fulfill their
requirement, a position can be established, but the reliability factor is smaller and consequently one
should commit funds less aggressively.
The Fibonnacci Series, discovered by the Italian mathematician Leonardo de Pisa in the 14th centruy, is
as follows: 1,2,3,5,8,13,21,34,55,89,144,233,etc. . ., where each successive number in the series is the
sum of the previous two numbers. The ratio between successive numbers can be seen to approach .618,
the so called "Golden Mean" or "Golden Ratio" of ancient Greek architecture. The three important ratios
the series provides us with are .618, 1, and 1.618.
With this series in mind, a trader must analyze the pattern of bull waves or bear waves in a given market,
the time frame within which these waves are taking place, and the price ratio between the length of
successive waves. When each of these categories has satisfied its Fibonnacci "fit", one should have
obtained an entry point in the futures market which provides a fine degree of reliability, an accurate
projection of profit, and a pre-ascertained risk level should one of my categories be penetrated or
invalidated. Since the determination of price ratio and time cycle can be made with greater ease than
pattern delineation (it takes long experience to pinpoint patterns with a relaxed objectivity) neophytes
will generally use pattern as a backup to price and ratio, but in fact each element should be given equal
weight.
Some examples of recent markets which are quite easy for the beginner to conceptualize;
HOGS:
The hog market made its cycle and price lows in April of 1980, and began its bull move. Major leg I gave
us the requisite 3 intermediate moves in every bull phase, then corrected exactly the required 61.8% ratio
of the first major wave up (December, 1982, at 38.00), and did so precisely on the 89 week cycle from
the lows made in March of 1980. Consequently all three requirements were met for establishing major
long positions. The second major wave up projected to a minimum of 68.00 based upon a ratio equal at
least to major wave I, and this projection was achieved as my next major Fibonnacci cyclethe 34 week
cyclewas completed. The Three required intermediate waves are also easily discernible in major wave
11, so that with pattern, time, and ratio satisfied at the top of the market, shorts could be legitimately
entered with close stops above ratio highs, long before the trends had begun to break down or computer

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Stocks & Commodities V. 1:4 (70-73): Fibonnacci Cycles by TUCKER J. EMMETT

trend followers had received their sell signals.

We are currently in the process of completing our down wave pattern, with the third major down wave
expected to reach the 61.8% level correction of major wave II at 49.20, with the 34 week cycle occurring
the week of April 4. Shorts will be reversed and longs entered, assuming our three categories make their
"fit" as expected, looking now for the beginning of major wave III back up again. Close stops below the
34 week lows will be used, so that if our time cycle is invalidated or our price ratio is severely penetrated,
our risk will only be a slight one.
For the beginner, the hog market the past several years has been extremely easy to analyze and to trade on
my cycles. Note also that the down wave we have been in since our 68 highs can be broken down very
adequately into its proper subdivisions: leg 2 being equal to 1.618% of leg 1, and the correction from
52.50 to 60.00 being a precise 61.8% of leg 2.
BONDS
The bond market has provided somewhat more complexity, but has also been relatively easy to analyze
and trade based on my Fibonnacci increments.
The price lows occured just a shade before the actual lows, but making long entries on the week of my 89
week cycle produced entry prices at very satisfactory levels, with the ability to use close stops below the
89 week lows. Our second leg up occured immediately giving us a full 1.618% of the first leg, and the
next cycle low at 13 weeks gave us our reentry point. Very close stops would have been elected several
weeks later as the 13 week cycle was briefly penetrated, but accurate pattern analysis showed the
necessity of our third leg up, so there was no cause for panic, since clearly only two legs had thus far been
completed. Leg 2 provided me with a 1.618 objective at (a), and our next 34 week cycle gave us new long
entry points for those who missed the thirteen week entry. Our third major leg up evolved into a more
optimistically bullish pattern than previously hoped for by objectives at (a), with minor legs 1 and 2
giving me objectives at the 79.00 level. Once the 55 week (34 week and 21 week) cycle had completed,
our requisite pattern, time, and ratio all had been fulfilled, and shorts could be initiated with close stops
above the 79.15 highs. The next major cycle occurs the week of April 11, which should provide a
secondary pullback near those highs and a chance for selling the market again for the possibility of
another down move, with very close stops and hence minimum risk. I see only a two wave down pattern
thus far, and would expect a third minor wave before our corrective leg can be deemed safely completed.

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Stocks & Commodities V. 1:4 (70-73): Fibonnacci Cycles by TUCKER J. EMMETT

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Stocks & Commodities V. 1:4 (70-73): Fibonnacci Cycles by TUCKER J. EMMETT

SOYBEANS
The soybeans provide even more complexity over the past year, because of the interesting down wave
pattern that evolved, the consequences of which were not clearly delineated until the lows had been
completed.
Major wave II was almost equivalent to major wave I, which jibed nicely with expectations despite the
tricky perambulations of the internal minor waves (it takes a thoroughgoing expert to decipher a complex
Fibonnacci wave pattern), but major wave III was 61.8% of major wave II, which is a most unusual
formation. Pleasantly enough the lows occurred on the bottoming out of very long term 5 year-8 year
Fibonnacci cycles, so that when the move up from 5.18 occurred, one could be fairly confident that
downwave pattern time and ratio had been completed and we had nowhere to go but back up, probably
dramatically so.
The subsequent move up we have seen the past several months has been almost fairly easy to trade. The
obvious three minor waves took place to mark the completion of our first leg up, we then corrected
exactly 61.8% of this first leg precisely on the 21 week cycle lows as indicated. This provided the perfect
buy in point for those wishing to capture expected leg 2 upwards in this market, having waited for
secondary confirmation that we were indeed entering into a new bull phase. Leg 1 provides us with near

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Stocks & Commodities V. 1:4 (70-73): Fibonnacci Cycles by TUCKER J. EMMETT

term objectives near $7.00 on the spot contract for leg 2, and then longer term objectives should be
substantially above that for leg 3. {We are only looking at very near term cycles in the beans. Older
traders will recall that beans made a move to $13.00 ten years ago, and this represented at the time the
completion of our major wave II, so that major wave III is still to come, taking out the old 13 dollar
highs. The minor bull moves we are looking at right now should be just the tip of the long term bull
iceberg, but it does not pay to gaze too far down the track, since one risks being stopped out and losing
one's position on the fast sharp cycle corrections.

GOLD
The gold market is currently the most complex of the various markets I trade and analyze. The bear
market that began at 8 75 completed its three major down waves, leg 2 exactly equal to leg 1, and leg
three being 1.618% of leg 2. Perfect. When our 295 objectives were hit, we had nowhere to go but back
up on my work and analysis. But our 233 week time cycle hit as indicated, and our next major 55 week
cycle was briefly taken out by the price lows. The predicted and expected bull move up thus occurred
slightly out of cycle "sync" with wave 3 failing to meet nearterm targets, but topping out very nicely on

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Stocks & Commodities V. 1:4 (70-73): Fibonnacci Cycles by TUCKER J. EMMETT

the 34 week cycle from price lowsan unusual occurrence. We have now corrected very nearly 61.8% of
our first major leg up, and when pattern and cycles also correlate, we will be ready for new long entries
with next upside targets at $649.
In sum, the more intricate a market pattern becomes, the more work is required by the trader to make
accurate determinations of his entry and exit points, on either a short term or long term basis. Since
pattern provides a check on time and time provides a check on ratio, my technical approach provides a
series of protective mechanisms which enable the placing of stops at low risk levels. When something
goes wrong with a trade, one realizes it immediately and should exit immediately if any category
expectation is violated. Since diversification among markets provides a further element of spreading out
risk, I generally prefer handling client accounts of $20,000 or more; this permits them entry levels in the
six or seven markets (out of the 20 I continually analyze) whose Fibonnacci fit is currently the most
accurate, while the remaining markets can be left to percolate until they have reached a conjunction of
their three requisite categories.

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