The golden ratio in the stock market is the proportionate relationship of one wave amplitude to another. There is also evidence to support that these relationships exist in time. In my experience, the proportionate amplitude of waves can be detected more easily and consistently for forecasting than time. (But, it doesn’t stop me from trying to figure out time also.)

The following Fibonacci ratios are the most commonly found ratios in the stock market: .382, .500, .618, 1.00, 1.618, and 2.618. These ratios can be applied as either extensions or retracements of wave patterns to forecast price action.

For example, the structure of a motive or impulse wave is 5-3-5-3-5. The most common expression of the golden ratio in a motive or impulse wave is that wave 3 extends to a 1.618 ratio of wave 1, and, in such cases, wave 5 tends toward a .382 ratio of the entire length of waves 1 through 3. Let’s take a look at the primary trend wave count thesis from last week to see if these desired proportions are present.

Using a Fibonacci extension tool available with most charting software, one can determine that the actual proportions of the waves are consistent with my thesis: wave 3 is very close to a 1.618 ratio of wave 1, and wave 5 is close to a .382 ratio of waves one through three. That is a powerful confirmation that we have completed five impulse waves down and an example of how the golden ratio presents in the stock market.

Golden Ratio Present in Stock Market

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Continuing with my primary trend thesis, I suggested that we were probably in the process of a counter-trend rally second wave. We will now use Fibonacci ratio analysis to target probable turning points. First I will apply a retracement of the entire move from the top.

The inside band of Fibonacci numbers are the resultant retracement levels. Last week I identified a completed counter-trend double zigzag at the 60min level, and I suggested that the downward move from that point was probably a correction of a correction. I then deduced that since we were almost finished with another double zigzag, and near the .500 Fibonacci retracement level, we had a strong set up for a turn. That was in fact correct. With a confirmed turn, I can now project a Fibonacci extension of the double zigzag from the bottom (W-X-Y).

The double zigzag is now part of a larger combination at one higher level of degree, and I have new information to include in our calculations for probable targets. In doing this I have an overlap of two Fibonacci relationships. Both the .618 retracement level and the 1.00 extension are at the same level. This is now my most compelling target for two reasons: 1) A 1:1 ratio is the most common extension of a corrective combination. 2) A .618 to .81 retracement is the most common retracement for a second wave.

New Probability Target for Retracement

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Here is one more example of Fibonacci ratios in the stock market on the same chart. I mentioned earlier that second waves most commonly retrace .618 - .81. Take a look at the ratios of all the second waves down from the top.

Repeating Fibonacci Ratios in Stock Market

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The relationship between accurate wave counts and the golden ratio is key. It is the best method for proofing wave counts. If the symmetry isn’t there on some level, the wave counts are probably wrong. Nature loves symmetry and proportion, and so does the stock market. Coincidence? What would Isaac Newton think?


References:

Elliott Wave Principle: A.J. Frost and Robert R. Prechter
Secrets of the Great Pyramid, Peter Tompkins and Livio Catullo Stecchini

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