By Vincent Troncone of Pennies from Heaven, The Market Reversal Report and Vindicator*

Leonardo Pisano Fibonacci was an Italian mathematician who, centuries ago, discovered a pattern that occurs naturally throughout our world. This pattern is exhibited in the behavior of stock and commodities markets to some extent as well.

Fibonacci forecasting is certainly nothing new or something I created, but it is simple and tends to work well when applied properly.

In the markets, this relationship is expressed in price. Basically, the Fibonacci Method states that commodity / stock prices will increase or decrease at specific ratios times the current wave of market price action. We will use the ratio of 1.618 for our application here.

In theory, this method is very simple. When looking at a daily commodity price chart (see Example 1), identify two market highs or lows. Then, count the trading days in between the two established points.

You then multiply the number of trading days by 1.618. Take that number and project forward that many trading days from the second high or low. This will give you the approximate turning point in that market.

Example 1:

1.618 x 10 Trading Days between Lows = 16.18 trading days. Approximately 16 trading days from the second low should be a reversal day.

If prices have been moving up to the projected reversal point, a decline can be expected. Likewise, if prices have been dropping toward the reversal point, you can anticipate a rise.

This method does not identify the duration of the reversal or trend. On a daily chart, you can use a slow stochastic on a standard setting as an additional confirmation tool as the predicted reversal day draws near.

This approach can often pick market reversals to the day, but there is no guarantee this will happen all the time. Remember that this is not an exact science.

The more significant the highs or lows are -- meaning the magnitude of the highs and lows -- and the greater number of days between the two points, the greater the accuracy of this method.

A minimum of seven trading days between the two highs or lows is suggested (or seven bars when using intraday charts).

Please see the subsequent charts for examples using the daily time frame.

The following charts show The Fibonacci Method at work. Notice that the market did reverse on the exact days projected. The previous chart used two lows for the calculation while the subsequent chart used two highs for the calculation.

Notice how the slow stochastic confirms the reversal in the market as pointed out by the vertical green line. Also notice that I did not round off the calculation to 13 days. Rounding off has its pros and cons. I suggest you do what works best for you.

Here are two more examples of the Fibonacci Method in action using intraday charts.

As you can see from these two charts, the reversals occurred exactly as predicted. The first subsequent chart used two lows for the calculation. The chart after it used two highs for the calculation. Notice again, I did not round off the calculations and just used the base number.

What You Can Reasonably Expect

The Fibonacci Method is a tool, not The Holy Grail, so do not expect 100 percent accuracy. But, I believe these simple examples show you some possibilities that exist in forecasting the markets.

*Reprinted (and modified) with permission from Vincent Troncone. Info@pennies-from-heaven.us www.pennies-from-heaven.us.

There is no guarantee that Pennies from Heaven, The Market Reversal Report or Vindicator will generate profits for the reader.

Forex, futures and options trading involve high risk, and you can lose a lot of money. When investing in futures, you may lose more than your original investment. When purchasing options, you may lose all of the money you invested. According to many experts, most individual investors who trade commodity futures or options lose money. There is a substantial risk of loss in trading futures and options. Do not risk money you cannot afford to lose. Past results are not necessarily indicative of future results. There is no guarantee that the information in this article will generate profits for the reader. FutureSource.com, a division of eSignal, provides all charts.