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Futures: How Important Are Fibonacci Numbers?
Elliott Wave International discusses a recent rally in cotton futures as measured in Fibonacci proportions
By Morgan Lee
If you’ve been reading articles on Elliottwave.com for a while, chances are you probably know that Fibonacci numbers play an important role in Elliott wave analysis of commodities and other markets.
How important? Very. You see, wave structures must have that "right look," and proper proportions between waves are measured by using Fibonacci ratios. For example, third waves in the basic 12345 Elliott wave sequence often equal 1.618 percent of wave one – a Fibonacci number.
This makes Fibonacci ratios a great method for spotting possible turning points. In third waves, once you know one has started, you can estimate 1.618 percent the length of wave one and mark that area as a likely ending point for wave three.
But notice that I said “likely.” It's important to keep in mind that wave lengths are not set in stone. That's why to do proper Elliott, you need to know more than just the most common Fibonacci ratios – because a wave could surpass or under whelm your expectations.
With that in mind, let’s look at tonight’s (March 4) Daily Futures Junctures. In tonight’s issue, editor Jeffrey Kennedy zooms in on the cotton futures market. Cotton has been in the midst of a third-wave move, which has now clearly surpassed 1.618 percent of wave one, as the chart below illustrates (some wave labels have been removed for this publication):
So, what does this "overshoot" mean for cotton? Well, as Jeffrey says, “I prefer to treat [Fibonacci rations] more as milestones along a path to an ultimate destination than a destination themselves.”
Which means that the rally in cotton could have further to go.
How far? Find out where cotton's next most likely turning point is today by signing up for a risk-free 30-day subscription to Jeffrey's Daily Futures Junctures.