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Using Fibonacci

Part 2

Wayne Gorman

By

EWI eBook

Part 2: How To Use Fibonacci Relationships To Set

Trading Strategy

Using cocoas price chart to show how to find turning points with detailed Fibonacci retracement

analysis

A review of Starbucks Fibonacci relationships and turning points

Reviewing the Euro/USD price chart for Fibonacci relationships and turning points

A few questions from the Fibonacci webinar participants

Introduction:

Welcome to the second part of Elliott Wave Internationals eBook, How You Can Identify Turning Points

Using Fibonacci, which discusses how to use Fibonacci relationships to set trading strategy. In this course,

we will cover three different trading scenarios. The first will be in cocoa futures, then we will look at Starbucks

Corporation, and finally we will discuss the Euro against the U.S. Dollar in the foreign exchange market.

How You Can Identify Turning Points Using Fibonacci Part 2 2008 Elliott Wave International www.elliottwave.com 1

Chapter 1: Fibonacci Analysis of Cocoa

Identifying Structure

Note: The Cocoa analysis beginning with Figure 1 starts on Slide 4 of Wayne Gormans Online Trading

Course, How You Can Identify Turning Points Using Fibonacci Part 2.

Figure 1

Lets start our detailed Fibonacci analysis

with a situation in cocoa. This is a daily

continuation chart of the cocoa futures

contract traded on the New York Board

of Trade. We are going to start trading

at the end of the graph on the right. That

is May 24, 2001. We are going to put

our first trade on, right at the opening of

this market. Before we start trading, we

should put some wave labels on here.

Figure 2

We are starting right from the major low

at the left of the graph. That major low

occurred on December 12, 2000, and is

674. We can count an impulse wave from

that low; there are waves 1, 2, 3, 4 and

5 in red for the Intermediate wave (1).

Now, we are in wave (2) to the downside.

We see a five-wave impulse wave: 6,

7, 8, 9 and 0 for wave A; then there

is another corrective structure a, b

and c for wave B.

So, what do we have here? We have five

waves down. The B wave in red is an

expanded flat, because wave b goes

beyond the start of a, and wave c

goes beyond the end of a. We basically

have a 5-3 structure, so far. What does

that sound like to you? A zigzag, right?

Zigzags are 5-3-5. We want to determine

how far it has to go to the downside. To

be sure, we are going to check a few

things, because it may not be totally clear

that the B wave is over. The a wave is

a 3. The b is a 3. The c wave can be

counted as an ending diagonal with waves 1, 2, 3, 4 and 5. Therefore, we will be looking to go short on May

24, 2001.

How You Can Identify Turning Points Using Fibonacci Part 2 2008 Elliott Wave International www.elliottwave.com 2

Chapter 1 Fibonacci Analysis of Cocoa

Figure 3

Before we do that, lets get our bearings and see how far we have come down. I am doing a Fibonacci retrace-

ment analysis using this table. I am going from the low of 674 up to the high of 1202 and seeing how much

we have retraced so far. Look at

the end of wave A in red. Wave

A almost makes a 50 percent re-

tracement. The b wave within

wave B goes a little bit lower.

The A wave comes in at 949,

and the b wave is at 945, a few

ticks lower. So, we have done

50 percent, which is certainly

viable. But what do we know

about second waves? Second

waves make deep retracements.

Therefore, we may want to look

for something like 876, which

is the .618 retracement of wave

(1). We do have room to come

down if this is, in fact, going

to be a 5-3-5 zigzag. We could

come down to 876. We may

even come down to 787. We

have to analyze it further, but,

for now, we will keep this 876

in mind, in terms of setting price

targets.

What about at the end of the

graph, though? Can we be sure

that the wave or all of wave B is

over? We do not know.

Figure 4

Here, I am looking at how far

wave B has traveled In terms of

retracing wave A. Look at the

second red dotted line down.

We see that wave c or wave B

basically has completed a .618

retracement of wave A. That im-

mediately tells us that there is a

good chance that wave c has

finished (which means wave B

How You Can Identify Turning Points Using Fibonacci Part 2 2008 Elliott Wave International www.elliottwave.com 3

Chapter 1 Fibonacci Analysis of Cocoa

has finished), and we are going to be heading to the downside. Could it go further? Maybe we did not count

wave c correctly. That is possible, but we have some proof here that wave B has most likely ended. There is

a bit of a risk here. What happens after the termination of an ending diagonal? A swift major reversal occurs.

So, we are not going to have much time to decide. We have to be careful if we say, Well, lets wait a few days

and see what happens. We may miss a big move, and we do have that .618 retracement.

Fibonacci Relationships

Figure 5

We can also look at the length

of wave c relative to wave a

from a Fibonacci perspective.

We start at point R, which is

the beginning of wave a. We

end at the letter S, which is the

end of wave a. Then we are

extending from point T, which

is the start of wave c or the

end of wave b. We are looking

at some Fibonacci multiples or

relationships.

We know that a common rela-

tionship is for wave c to equal

wave a; that is what the 1.000

means on the chart below 1084.

Equality with wave a comes in

at 1084, and we have gone be-

yond that. The top of wave c is

1109. We also know that within

an expanded flat, it is common

for wave C to equal 1.618 multiplied by the length of wave A. Well, if that were the case, we would be up at

1170. That is way beyond the .618 retracement. The .618 is at the second dotted line down on the previous

chart. 1170 is even beyond the .786 retracement. So, if c is going to be equal to 1.618 multiplied by the

length of wave a, then we are going to retrace most of wave (1). That is a deep retracement.

How You Can Identify Turning Points Using Fibonacci Part 2 2008 Elliott Wave International www.elliottwave.com 4

Chapter 1 Fibonacci Analysis of Cocoa

Figure 6

At this stage and with all things

considered, if this is an end-

ing diagonal, we want to act

quickly. I think we have good

enough evidence to tell us that

wave c (and therefore wave B)

has probably ended, and we are

heading down in Minor wave C

of Intermediate wave (2). So, we

are going to go short.

The last tick on the right is the

open at 1076, and we do not

want to go past the top of wave

c. Wave c of B ends at 1109.

So, we are going to set our stop

at 1110, just one tick above that.

We really would not want to

see further price action above

1109. Therefore, we have a tight

stop.

Price Targets

Figure 7

Now, with the available price

data, we want to set some price

targets and, hopefully, a time

target. Lets go back now and

see that retracement here. Re-

member, we said that the .618

retracement of wave (1) comes

in at 876. That is one point we

can look at for a projection.

How You Can Identify Turning Points Using Fibonacci Part 2 2008 Elliott Wave International www.elliottwave.com 5

Chapter 1 Fibonacci Analysis of Cocoa

Figure 8

What is the other thing that we

can do using Fibonacci relation-

ships? We can look at the length

of wave A in red. We are going

from point R, the beginning of

wave A, to point S, the end of

wave A. Then we are going to

extend multiples of that length

from point T, which is the end

of wave B in red. This gives

us estimates for wave C within

wave (2). Remember, we are

looking for more than one point

that might be close. Right now,

the only target point we have is

876 to the downside. Look at the

1.000 mark. That means it is a

1-to-1 relationship, and it comes

in at 856. If wave C equals wave

A, it would end at 856. If wave

C is 1.618 multiplied by the length of wave A, it would end down at 700; that would be a fairly deep retrace-

ment. Yet 856 is somewhat close to the 876. So, we have a couple of good points. Again, right now, we are just

looking for a general target or something to aim for as this price move for Cocoa unfolds to the downside.

Figure 9

I now have this Fibonacci clus-

ter. Wave (2) retraces .618 of

wave (1) at 876, and C equals A

at 856. Remember, we are look-

ing for wave C in red to come

down to complete wave (2).

How You Can Identify Turning Points Using Fibonacci Part 2 2008 Elliott Wave International www.elliottwave.com 6

Chapter 1 Fibonacci Analysis of Cocoa

Figure 10

We are short at 1076 and have a

stop at 1110. For a price target,

we will shoot for 856 for now,

because C equals A is a strong

relationship. We certainly could

use 876 or a range of 876 to 856;

we will fine-tune this price ob-

jective as we go forward.

Figure 11

On this chart, I have moved

ahead several days in time, and

you can see that we are breaking

out to the downside. Notice that

I have marked our potential risk

and potential reward. Given our

stop at 1110 from the 1076 start

point and our projected target

of 856, our potential risk is 34

points and our potential reward

is 220 points. So, we have a very

good risk-to-reward ratio, and

we have already come down.

How You Can Identify Turning Points Using Fibonacci Part 2 2008 Elliott Wave International www.elliottwave.com 7

Chapter 1 Fibonacci Analysis of Cocoa

Figure 12

Lets now analyze this move

down. I put some wave labels

on here. We can count the waves

within wave C as 6, 7, 8, 9

and possibly 0, or maybe 8

ends at the bottom right. It is

debatable. Its possible that at

the start of wave C, there is a

small 6 -7. In both cases, there

are three waves; we either have

three waves down to the second

to last low or to the very last low

on the right.

Can we get out of the position

here? Certainly we can. At the

second to last low, we are down

to 914. At the last low, the level

is 897. So, we certainly have a

decent profit. However, at these

levels 897 and 914 we do not even achieve parity with wave A. In other words, if we are going to take the

view that wave C has ended, then wave C would be less than wave A in terms of length. It would be approxi-

mately equal to 80 percent of wave A. We want to stay in this position. Remember, we still see the potential

for 856 or 876. Instead of just getting out, we can bring our stop down and still shoot for the target of 856.

Now that we have more price information from waves 6 through 8, we can start to calculate additional Fi-

bonacci points, right? We can look at the distance of waves 6 through 8 and try to project wave 0 within

wave C. We can also make some

Fibonacci time projections. But

first matters first. We really

should adjust our stop level.

Figure 13

Assuming for now that the sec-

ond to last low is wave 8 within

C, we are looking at a Fibonacci

retracement of wave 8. We do

not want to have the price action

go much above a .618 retrace-

ment, though, because that

probably would indicate that the

move has ended. So, lets lower

the stop down to 1026, which

is just above the .618 level at

How You Can Identify Turning Points Using Fibonacci Part 2 2008 Elliott Wave International www.elliottwave.com 8

Chapter 1 Fibonacci Analysis of Cocoa

1024. This way, we will hold onto the position and see what happens. Unless we get a bad fill, we know that

we really have no more risk. We do have opportunity loss: if the market moves up to 1026, that is certainly a

lost opportunity, but not an outright loss. So, with the stop at 1026 now, we are going to hang in there, because

there is strong evidence that we can go down even more.

Figure 14

We have moved ahead several

days. Now it looks like wave

8 ends at the last low. The next

high could be 9, and the fol-

lowing low could be 0.Then,

maybe it is over, but we still

have not even reached parity.

The lowest low to the right is

880. That still does not give us

parity with wave A. At 880, we

are about 90 percent the length

of wave A. It is still possible that

we can stay in and watch the

price go down further to that 856

level, or we can get out here. But

again, we can just keep lowering

our stop. There is no need to exit

too quickly.

Figure 15

On this chart, we have moved

our wave 8 label down. I think

that maybe the next rise can

be a wave 9 expanded flat.

Possibly. Lets move ahead

a few days now that we have

moved wave 8 down.

How You Can Identify Turning Points Using Fibonacci Part 2 2008 Elliott Wave International www.elliottwave.com 9

Chapter 1 Fibonacci Analysis of Cocoa

Figure 16

We see now that we have moved

up substantially. The top level at

the right is 1000 even. Notice

what happens next: We gap

down from there. Maybe this

price move is going up. Maybe

the move is over. Just look at the

whole wave (2). It is not what

you call very sharp, but again,

we can adjust our stop. This is

not the best looking 9. Look

at how small the 7 is, and this

9 is a bit large. It is awkward-

looking to be a wave 9, but it

does have the characteristics of

a corrective structure. We will

put a 9 up there at the top for

now just to give us a reference

point.

Figure 17

If we are going to hold on here,

we want to bring our stop down

even more. Look at the .618

retracement of wave 8 that

comes out at 1018. So, we are

going to move our stop down to

1019. Remember, we are short

at 1076 and would not want to

see a move above this 1018.

We are going to take a stand

here. We see that we are gap-

ping down. There is a good

chance that maybe we are com-

ing down in wave 0. We have

some valuable information here

with waves 6, 7, 8 and 9 of

wave C in red. Next, we will do

some more Fibonacci analysis

and see if it coincides with that

856 and 876. We can also do

time analysis.

How You Can Identify Turning Points Using Fibonacci Part 2 2008 Elliott Wave International www.elliottwave.com 10

Chapter 1 Fibonacci Analysis of Cocoa

Figure 18

Lets look at the whole move of

developing wave C by starting with

the net distance traveled of waves

6 through 8. In other words,

the beginning of wave 6 is at my

starting point R, and point S is the

end of wave 8. Then, we are going

to what I think is the end of wave

9, which is point T. We can now

project downward some Fibonacci

relationships for wave 0, and that

is what this diagram shows you.

That .618 869 in blue is saying

that if wave 0 goes down to 869, it

will be equal to .618 multiplied by

the net distance traveled of waves

6 through 8. If wave 0 goes

down to 788, it will be on parity

with waves 6 through 8. If wave

0 is 1.618 multiplied by the length

of waves 6 through 8 of course,

that would be an extension we

will be down at 657. That does

not work; we can eliminate that

option because it goes below 674.

In Elliott wave analysis, wave (2)

cannot go beyond the start of wave

(1). Even the 788 is way past our

856 target. But we are going to take

note of the 869 level. We will build

on our Fibonacci price cluster, be-

cause now, besides 856 and 876,

we also have 869. Lets look for

some more relationships here, all

based on the assumption that wave

9 ends at the top right.

Figure 19

Lets look at some Fibonacci dividers. We are looking at how wave 9 divides waves 6 through 0. Look

down at the 824: if wave 0 ends at 824, then the entire length from 1109 to 824 is equal to 2.618 multiplied

by the length from 1109 to 1000. So in other words, if the distance from 1109 to 1000 is 1 (the net distance

traveled of 6 through 9), the entire length is 2.618 at 824.

How You Can Identify Turning Points Using Fibonacci Part 2 2008 Elliott Wave International www.elliottwave.com 11

Chapter 1 Fibonacci Analysis of Cocoa

Figure 20

That is the same as saying that

the end of wave 9 creates the

Golden Section. If the entire

length is 2.618 of the length

from 1109 to 1000, that means

that the length in red is .618 of

the whole (1.618 over 2.618 is

.618), and the length in blue is

.382 of the whole (1 over 2.618

is .382), which means that the

lower section is .618, and the

upper section is .382. So, we

have another Fibonacci point. If

wave 0 of wave C of wave (2)

ends at 824, it forms a perfect

Golden Section.

Figure 21

We have a decent Fibonacci

price cluster, thanks to our anal-

ysis in which we were looking

for wave 0 of wave C of wave

(2). Wave (2) retraces .618 of

wave (1) at 876. C equals A at

856. 0 of C equals .618 multi-

plied by the net distance traveled

of waves 6 through 8 at 869.

We see that the end of wave 9

of wave C forms that GS, or

Golden Section; there is a .382

on the upper section and a .618

on the lower section, if wave

0 ends at 824. So, we have a

whole cluster of points that we

can monitor.

How You Can Identify Turning Points Using Fibonacci Part 2 2008 Elliott Wave International www.elliottwave.com 12

Chapter 1 Fibonacci Analysis of Cocoa

Figure 22

What about the price target

then? I have made it a range of

somewhere around 856 to 824.

I have given up on the 876, be-

cause I think that it is possible

to go a little bit further than that.

But we will keep everything in

mind.

Time Targets

Figure 23

Now, lets look at time targets.

We want to do some Fibonacci

analysis with respect to time

on this C wave. We are starting

right at the beginning of wave

6 of C. At the bottom, the num-

bers in blue are all Fibonacci

numbers. Do you see the 5, 8,

13, 21, and 34? If the entire C

wave lasts 34 days, it will end

on Friday, July 6, 2001. The last

piece of price data is from July

3. The high at the end of wave

9 is July 2, and then we have

the point on July 3. This is tell-

ing us that there is a possibility

that the whole move may end

on July 6. That really is just a

couple of days away.

How You Can Identify Turning Points Using Fibonacci Part 2 2008 Elliott Wave International www.elliottwave.com 13

Chapter 1 Fibonacci Analysis of Cocoa

Figure 24

Lets look at some other rela-

tionships. Now here, we are

looking to see if we can identify

a Golden Section with respect

to time. We start at the begin-

ning of wave 6 of wave C and

extend this forward. We want

to see if either the end of wave

9 or the beginning of wave

9 creates a Golden Section.

The .618 red dotted line tells us

that the end of wave 9 forms

a Golden Section .618 for the

first time section and .382 for

the second if this entire move

ends on July 26, 2001. So, that

is one point. That is pretty far

out in time, since we are only

at July 3, but we can keep that

point in mind.

Figure 25

Now here is another one. Instead

of looking at the end of wave

9, we are looking at the end of

wave 8, which is the beginning

of wave 9. We are looking for a

Golden Section with respect to

time. Notice the .382. If the C

wave ends on July 10 or wave

0 of C ends on July 10 the end

of wave 8 or the beginning of

wave 9 will divide the whole

time frame into .382 and .618.

So, here is another date, July 10,

to keep in our memory besides

July 6.

How You Can Identify Turning Points Using Fibonacci Part 2 2008 Elliott Wave International www.elliottwave.com 14

Chapter 1 Fibonacci Analysis of Cocoa

Figure 26

Now, lets try a Fibonacci exten-

sion. We look at the total time

from the beginning of wave 6

to the end of wave 8. Then, we

extend from wave 9. We are

looking at .382, .618 and even

1.618. In terms of time, if wave

0 is equal to .382 multiplied

by the net distance traveled of

waves 6 through 8, we get an

end point of July 9. If wave 0

is equal to .618 multiplied by the

net distance traveled of waves

6 through 8, we get July 13.

Now we are starting to get a

Fibonacci time cluster.

Figure 27

To sum up our Fibonacci time

targets: We can see that the end

of wave 8 of C forms a Golden

Section if 0 ends on July 10. In

C, .382 multiplied by 6 through

8 from the end of 9 gives us

July 9 for the end of 0. In C,

.618 multiplied by 6 through

8 from the end of 9 gives us

July 13. Remember, these are all

with respect to time, not price.

How You Can Identify Turning Points Using Fibonacci Part 2 2008 Elliott Wave International www.elliottwave.com 15

Chapter 1 Fibonacci Analysis of Cocoa

Figure 28

So now we have both a good

price cluster and a good time

cluster for Cocoa, which I have

summarized here. Here are our

prices: We are looking for 856 to

824. Now we have a time target

July 9 to July 13. I left out July

6 because it seems to be a little

too soon. By the way, these are

trading days, not calendar days.

When we are analyzing time on

a daily bar chart or less, we are

looking at the actual bars; so, we

are always looking at the trading

days. Whereas at higher time

frames, if we are looking at a

weekly or monthly, we are look-

ing at the actual weeks, because

we do not have trading weeks.

So, we have to have a bit of tolerance of the plus or minus one day, because we dont calculate fractions of

days. These estimates .618, .382 are always whole numbers. I am not putting up fractions of days. So we

could be off plus or minus one day. We have to consider that as well.

Conclusion

Figure 29

Before we move ahead in time,

what other analysis can we

do? Lets not forget some of

our Elliott wave guidelines.

Remember, this wave (2) is a

zigzag, so we can draw a trend

channel (the blue lines) that

contains the zigzag. We can

also channel an impulse wave

for wave C with green lines.

Notice that these two channels

intersect at about the 825 level.

The bottom of these channels is

certainly within our price-target

range.

How You Can Identify Turning Points Using Fibonacci Part 2 2008 Elliott Wave International www.elliottwave.com 16

Chapter 1 Fibonacci Analysis of Cocoa

Figure 30

The red box Ive drawn takes

into account both our price and

time targets. So, we are going to

look now for this wave C move

to come into that box or close to

that box, and that is where we

are going to get out.

Figure 31

So, heres the chart showing

how Cocoas price moved in the

next few days. We are gapping

down. Notice that the price ac-

tion comes into our target area,

meeting our price and time tar-

gets. The exact day in the box

is July 10. The low of July 10

right now is 854. The range is

from 880 to 854. We have come

a little bit past the 856, so we

are going to get out. There is

no other reason to stay in at this

point, and with a fast-moving

market, it is probably best to

get out. We will get out in the

middle of the range between

880 and 854.

How You Can Identify Turning Points Using Fibonacci Part 2 2008 Elliott Wave International www.elliottwave.com 17

Chapter 1 Fibonacci Analysis of Cocoa

Figure 32

The middle comes out to 867,

and we end up with a profit of

209 points.

Figure 33

Look what happened next. The

low after wave 9 does turn out

to be wave 0 of C of (2), and

we do get a major reversal. As

a matter of fact, cocoa goes up

substantially into the start of

Intermediate wave (3).

How You Can Identify Turning Points Using Fibonacci Part 2 2008 Elliott Wave International www.elliottwave.com 18

Chapter 2: Fibonacci Analysis of Starbucks Corporation

Identifying Structure

Note: The Starbucks analysis beginning with Figure 34 starts on Slide 40 of Wayne Gormans Online

Trading Course, How You Can Identify Turning Points Using Fibonacci Part 2.

Starbucks that took place back in

2006.

Figure 34

Here is a chart of Starbucks from the

middle of 2004 up through almost

the end of 2006. The end of the

graph on the far right is the week of

November 3, and that is when we are

going to start trading. Lets put some

wave labels on this chart.

Figure 35

There is a big upturn here. Our con-

cern, of course, is really toward the

end of the chart, but we can label the

waves (3) and (4), and then waves 1,

2, 3, and 4 in red. That is certainly an

unusually deep wave 4, but the move

off of it looks impulsive and there

is no overlap. Wave 4 in red ends at

28.72, and the wave 1 high in red is

28.45. We are going to look at the

rise after wave 4 on a daily chart, and

we will see that we have an impulse

type of structure. But first, lets stay

with the big picture. Wave 3 ends

at $39.88 per share on Starbucks.

The next high after wave 4 is 39.50.

These are important prices.

How You Can Identify Turning Points Using Fibonacci Part 2 2008 Elliott Wave International www.elliottwave.com 19

Chapter 2 Fibonacci Analysis of Starbucks Corporation

Figure 36

Lets now do some Fibonacci

analysis here on the weekly chart.

We are looking to go long at the

end of this graph to capture the

end of wave 5 in red. We want

to basically capture that upward

move. If we go from the begin-

ning of wave 1 at point R to the

end of wave 3 at point S, we are

looking at the net distance trav-

eled of waves 1 through 3. If wave

5 equals .618 multiplied by waves

1 through 3, what is our target?

That comes out to 39.59. That

poses a little bit of a problem, be-

cause wave 3 ends at 39.88. This

projection is telling us that wave 5

might be truncated. We have been

on a long-term up-move for quite

a while. And 39.59 does go above

the high on the far right, which

is 39.50, but only by 9 cents. So

we are not going to put too much

weight on this number, but we

will keep it in mind.

Figure 37

What about a Golden Section?

Notice these dotted blue lines

here. We are looking at how wave

4 divides the entire move waves

1 through 5 into the Golden

Section. .382 is the first section

and .618 is the second. At 39.12,

there is a Golden Section, because

if the whole move is 2.618 of the

length from 28.72 to 22.29, that

comes out to 39.12. That is even

more of a truncated wave, which

again is not going to help us very

much. That does not even go above the high at the right of the chart. So these calculations are either telling us

that we need to be on watch for a truncated fifth or that they are just not working on the weekly.

How You Can Identify Turning Points Using Fibonacci Part 2 2008 Elliott Wave International www.elliottwave.com 20

Chapter 2 Fibonacci Analysis of Starbucks Corporation

Figure 38

So now we are looking at the daily bar

chart of Starbucks. Notice wave 4 in

red that we were looking at before. We

want to do some Fibonacci analysis

based on the daily chart, but lets first

put some wave labels on.

Starting from the low at wave 4 in red,

we can label waves 6, 7, 8 and 9

in blue. I put in the subdivisions of

wave 8 so that you can get an idea of

how I arrived at this wave 8. We have

(i), (ii), (iii), (iv) and (v) in red. Then

we have wave 9 in blue that looks

like a double zigzag. We have a gap

in wave (v) in red that we have to be

concerned about. Now we are looking

for wave 0 of 5 to the upside.

So, lets analyze this. The high at the

end of wave 8 in blue is 39.50. We

do not know if wave 9 in blue is

over yet. Lets not jump ahead too

much. That low in wave 9 is 36.22

on November 3. We will start trading

on November 3, and we are looking

to go long. However, we first want

to determine how we are going set a

stop. What is our stop going to be and

is wave 9 over?

Price Targets

Figure 39

Lets look at some price projections

here. Wave 0 in blue will end up

somewhere around the top right of the

chart. How do we get that number?

First, we look at the distance of wave

6 in blue from point R to point S. If wave 0 is going to equal wave 6, we add that distance onto the end

of wave 9, and we get 38.71. Well, that is even below those other 39 levels. Why are we looking at parity?

Because wave 8 in blue is extended, and if wave 8 is extended, we can usually expect wave 0 to equal

wave 6. That does not help us here, though, because 38.71 is too low. It is almost telling us that we are going

to have a truncated fifth wave. Maybe we will have to watch for that after all.

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Chapter 2 Fibonacci Analysis of Starbucks Corporation

Figure 40

How about this relationship,

then? How about looking from

the beginning of wave 6 in blue

to the end of wave 8 point R

to point S? We multiply that by

.382 and add that onto wave 9.

That gives us a target of 40.34.

In other words, at 40.34, wave

0 equals the net distance trav-

eled of waves 6 through 8

multiplied by .382. Now we are

getting somewhere. At least that

is higher than 39.50. That seems

to make some sense, so we are

going to take note of it. It is a

possible price target.

Figure 41

Lets look at the Golden Sec-

tion again but now on this daily

chart. We are looking at how

the end of wave 9 divides the

entire price movement into .618

for the lower half and .382 for

the upper half. That is the same

as saying that the entire distance

is equal to 1.618 multiplied by

the distance from 36.22 to 28.72.

We get a price target of 40.86 a

valuable piece of information.

If wave 0 ends at 40.86, then

wave 9 will have divided the

entire price movement into the

Golden Section.

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Chapter 2 Fibonacci Analysis of Starbucks Corporation

Figure 42

We have a Fibonacci price

cluster now to help us estimate

the end of wave 0 in blue,

which is completing the wave

5 in red, which is completing

wave (5). What does this tell

us? That we are talking about

a fifth of a fifth of a fifth wave,

so we have to be cautious here.

We are approaching the end of a

major move. Maybe we should

not even go long. Maybe we

should just let it play out and go

short, but why dont we try? It

looks like there could be a de-

cent move. We have Fibonacci

clusters here with price, so it

may be worth doing.

Let me review: 0 of 5 in red equals .382 multiplied by 6 through 8 at 40.34. The end of 9 of 5 in red forms

a Golden Section, if 0 ends at 40.86. Wave 5 in red of (5) equals .618 multiplied by the net distance traveled of

waves 1 through 3 in red at 39.59. Now remember that we can have a truncation. Wave 5 in red can be truncated,

and wave 0 in blue can be truncated. We will keep that in mind, but we are not going to look for a truncation.

For a price target, we just look at the mid-point of 40.34 and 40.86; that will give us a target of 40.50.

Figure 43

On November 3, the low is

36.22 and the high is 37.40; the

middle of that range is 36.80.

So, we are going to go long

at 36.80 with a price target of

40.50 based on that price clus-

ter. We should exclude the price

target of 39.50 unless we see

more evidence that there will be

a truncated fifth wave.

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Chapter 2 Fibonacci Analysis of Starbucks Corporation

Time Targets

Figure 44

Now, I want to go back to the

weekly chart and examine some

time relations. The numbers

87, 54, and 44 are all weeks.

Notice the .618 red dotted line.

We are looking to see how the

end of wave 3 in red, which is

the same as the beginning of

wave 4, divides the entire time

length for waves 1 through 5 in

red into the Golden Section. We

get an end date of December 22,

2006, which means that if this

entire move ends on December

22, the end of wave 3 will have

divided the entire time duration

into the Golden Section, the

first section being .618 and the

second .382. Well, December 22

is pretty far away from Novem-

ber 3, considering that we are

looking for a move over about

a week or two. Yet we will still

keep it in mind.

Figure 45

In terms of time, we can also

look at waves 1 through 3 and

extend from wave 4. We find

that .382 times that length is

88 weeks forward (a Fibonacci

89 minus 1), which comes out

to December 29. On the chart

before, December 22 was at 87

weeks, so December 29 is at 88

weeks.

How You Can Identify Turning Points Using Fibonacci Part 2 2008 Elliott Wave International www.elliottwave.com 24

Chapter 2 Fibonacci Analysis of Starbucks Corporation

Figure 46

Here is one last relationship a

Fibonacci 89 weeks for waves

1 through 5. That comes out to

January 5, 2007. These are all

pretty far away in time from

November 3, but we will make

note of them and see what hap-

pens.

Figure 47

Before we go forward with the

trade, there is a time target that

looks more reasonable back on

the daily chart. Look at the Min-

ute waves 6, 7, 8 and 9 in

blue. If wave 0 in blue of wave

5 in red ends on November 15,

then the beginning of wave 9

or the end of wave 8 in blue

will have divided the whole time

duration into a Golden Section.

For now then, we will set a time

target of November 15, 2006,

because it is the only close time

target we have.

How You Can Identify Turning Points Using Fibonacci Part 2 2008 Elliott Wave International www.elliottwave.com 25

Chapter 2 Fibonacci Analysis of Starbucks Corporation

Setting a Stop

Figure 48

Now we need to set a decent

stop level. For the stop, we look

at the retracement that wave 9

in blue makes of wave 8. We

are looking at the distance that

wave 8 travels from 29.37 to

39.50 as we also acknowledge

that the gap at 36.09 might com-

plicate things. It turns out that

the .382 retracement of wave

8 is 35.63. So, if we put our

stop below the .382 level, we

already have taken the gap into

account, and we do not have to

worry about it.

Figure 49

What else can we do? We can

look at wave 9 in blue more

closely and see if it has ended.

If it has not ended, we can map

out another level to put our

stop. I labeled this wave 9 as

a double zigzag (w)-(x)-(y).

We measure wave (w) and then

see if wave (y) equals wave (w),

which is a common relationship.

It is analogous to wave C equal-

ing wave A in a single zigzag. In

a double zigzag, we first look

for wave (y) to equal wave (w);

that is what 1.000 means on this

chart a 1-to-1 relationship.

Well, wave (y) equals wave (w)

at 36.22. We have already traded

at 36.22; that is the low here. So,

wave 9 may be over, but we cannot be totally sure. This Fibonacci price cluster can help us to determine our

stop. We already know that we have hit 36.22. So, we set a stop slightly below 35.63, which covers the gap.

That means that wave (y) could be a little bit longer.

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Chapter 2 Fibonacci Analysis of Starbucks Corporation

Figure 50

Here is all of our information on

one chart for Starbucks:

We are long at 36.80.

We have a price target of

40.50.

Based on our Golden

Section for time, we are

first looking for Novem-

ber 15.

If we go past that, we

will look for the end of

December.

We h a v e a s t o p a t

35.50.

Our potential risk is 1.3

points and our potential

reward is 3.7 points.

Conclusion

Figure 51

On this daily Starbucks chart,

we have moved forward several

days. We have a little bit of a

problem here, since we cer-

tainly have not reached 40.50.

That last high to the right on

November 15 is 39.39. We have

not even gotten above wave

8 in blue, which you can see

with the dotted line. Should we

label wave 0 in blue as having

waves 1, 2, 3, 4 and 5 and just

say, Well, its a truncated fifth

of another truncated fifth? It

could be truncated, but we will

give it another day. The other

thing we can do is raise our stop.

Lets just give it another day and

see what happens.

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Chapter 2 Fibonacci Analysis of Starbucks Corporation

Figure 52

So, now we are finally coming

up. This is November 16, so we

are one day past our time target.

The high up on the top right is

40.01, which means that we can

now eliminate the truncated-

fifth scenario. We have gone

beyond the wave 8 high. We

have gone beyond the high of

the other weekly chart wave 3

(not shown here) at 39.88. Yet

we must take caution. This is a

fifth of a fifth of a fifth, and we

cannot stay in much longer. We

can certainly get out here. We

have not gotten up to 40.50, but

we are close. We certainly have

met the time target of November

15. Can we wait another day?

Why dont we do this: If it starts

to come down a little bit, we will

get out on the next day. Hows

that? Lets see what happens.

Figure 53

That was a very bad decision.

Starbucks gaps down tremen-

dously the next day. Even if we

had raised our stop, we probably

would not have even gotten

filled. It goes down to a range of

37.54 to 36.72 that is a huge

drop. We have to get out now; it

looks like this is over. We basi-

cally broke even. So, here is a

case where waiting just one day

really killed us. It is certainly a

lesson to be learned.

In real time doing this, would I have waited another day? I might have. I would not have thought that this stock

was going to gap down, but then, after the gap down, I probably would have said to myself, Well, I should

have known that, because it was a fifth of a fifth of a fifth. Looking back, there were some other clues that

told us we really should have been cautious of a big down move. We just came up with Fibonacci relationships

telling us that the wave was going to be short or even truncated. It was a bit risky to have stayed on this long,

even though it was just one extra day. One day can make a big difference.

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Chapter 2 Fibonacci Analysis of Starbucks Corporation

Figure 54

One last chart going back to the

weekly. See where that wave 5

in red ends? That is a major top,

which we almost caught. Then

we have a major decline after

that in Starbucks. Now, lets

look at our third scenario.

How You Can Identify Turning Points Using Fibonacci Part 2 2008 Elliott Wave International www.elliottwave.com 29

Chapter 3: Fibonacci Analysis of Euro/USD FX

Identifying Structure

Note: The Euro/USD FX analysis beginning with Figure 55 starts on Slide 65 of Wayne Gormans Online

Trading Course, How You Can Identify Turning Points Using Fibonacci Part 2.

Euro against the U.S. Dollar in the

foreign exchange market.

Figure 55

Here is a daily continuation chart

of the Euro. These are futures. By

the way, the system I am using here

is Trade Navigator, also known as

GenesisFT. It provides you with a

lot of the Fibonacci tools, so you

can quickly do your calculations

just using your mouse.

In this chart, we are going from June

2007 up to the middle of November

2007. We are going to start trading

on November 13, 2007. Lets label

this chart.

Figure 56

There is a Minute wave 6 and wave

7 in blue on the left of the chart,

and we are now in Minute wave

8. We have waves (i), (ii), (iii),

and (iv). Within wave (v), we have

waves i, ii, iii and iv in brown, and

we are looking for wave v. In this

case, we are looking for an up-move

for wave v in brown within wave (v)

within wave 8 in blue. The wave

ii in brown is an expanded flat, and

wave iv in brown is a zigzag. So,

we have nice alternation there. Lets

analyze this after I give you some

data points that are important. The

low for wave iv in brown is 1.4528.

The high of wave iii in brown is

1.4760. The low of wave 7 in blue

on August 16 is 1.3370.

How You Can Identify Turning Points Using Fibonacci Part 2 2008 Elliott Wave International www.elliottwave.com 30

Chapter 3 Fibonacci Analysis of Euro/U.S. Dollar Foreign Exchange

Figure 57

The first thing we want to do is

get oriented. Where are we in

this wave count? Maybe wave

iv in brown has not ended. We

want to see how wave iv retraces

wave iii. I have put up my Fi-

bonacci table. What do we see?

We go from the beginning of

wave iii in brown up to the end

of wave iii. We see that wave iv

almost makes a .382 retracement

of wave iii. The .382 retrace-

ment comes in at 1.4523, and

we make a low at 1.4528. So, we

are just 5 points, or 5 ticks, away

from making a .382. Maybe

wave iv is over.

Figure 58

Just for the sake of comparison,

I thought Id show you that

wave ii in brown makes about a

.50 retracement of wave i.

How You Can Identify Turning Points Using Fibonacci Part 2 2008 Elliott Wave International www.elliottwave.com 31

Chapter 3 Fibonacci Analysis of Euro/U.S. Dollar Foreign Exchange

Figure 59

If we go up to the higher degree,

wave (iv) makes almost a .382

retracement of wave (iii). As a

matter of fact, it falls shy of it

almost by the same amount as

wave iv in brown.

Figure 60

Here, wave (ii) makes almost a

.50 retracement of wave (i).

How You Can Identify Turning Points Using Fibonacci Part 2 2008 Elliott Wave International www.elliottwave.com 32

Chapter 3 Fibonacci Analysis of Euro/U.S. Dollar Foreign Exchange

Figure 61

How else can we determine

whether wave iv is completed

and that the Euro/USD is ready

to start wave v? First, we are go-

ing to draw in a trend channel.

We have an impulse wave here.

Since we have identified what

we think are waves i, ii, iii and

iv, we connect the end of wave

ii to the end of wave iv. The end

of that wave ii is 1.4139, and

the end of wave iv is 1.4528.

Then we draw a line parallel to

that channel line that includes

the termination point of wave i.

Why do we pick wave i and not

wave iii? Because wave iii is

exceptionally steep, and one of

the guidelines is that you would

draw it from wave 1 rather than

wave 3, if 3 is steep. As you can see, it does not matter, because when we include the end of wave i and extend

it, it includes the end of wave iii anyway. So, in addition to the Fibonacci analysis, we have a perfect trend

channel that can help us set the

price target for wave v.

Setting a Stop

Figure 62

Now we want to set a stop. The

rate could come down further

maybe it goes below the chan-

nel, or maybe we have to redo

the channel. Or maybe it is a

throw-under, and we will have a

throw-over for wave v. The blue

box is the previous fourth wave

within wave iii. It is debatable

whether that fourth wave has

ended at 1.4517 or further up

at 1.4537.

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Chapter 3 Fibonacci Analysis of Euro/U.S. Dollar Foreign Exchange

Figure 63

Notice the 1.4519. That is the

general area of the previous

fourth wave at one lesser degree.

So, we are going to keep that in

mind, in terms of our stop. Lets

blow up wave iv.

Figure 64

That small wave iv all the way

to the right ends at 1.4528. I

have gone all the way down to

a 15-minute bar, because I really

could not see the structure on the

hourly chart. We want to see if

this wave iv is over or not; if it

is not over, we want to see how

far it has to go. Now I am finally

able to see a wave structure that

I can recognize and label.

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Chapter 3 Fibonacci Analysis of Euro/U.S. Dollar Foreign Exchange

Figure 65

Although you could not see it

on the daily, the brown wave iv

on the right forms a zigzag. We

have wave A in red with five

waves down (1) through (5).

Of course, this is A of a small

degree. We have a wave B tri-

angle in red. We see the (A), (B),

(C), (D), and (E) of the triangle.

Then we have five waves down

for wave C in red on the right.

So we have a lot of information

here. Notice waves (1), (2), and

(3) of wave C. Wave (4) really

is an A, triangle B, and then C

(labels not shown on chart); that

is what those green lines mean

within wave (4) of C. Lets

analyze this and see if we can

get more evidence that wave iv

in brown is close to ending or

has ended.

Figure 66

Well, what do we know about a

zigzag? There is a relationship

between C and A in red. I

measure from the beginning of

A to the end of A point R to

point S. I extend or expand that

from the end of wave B point

T at 1.4685. What do we find?

Look at the numbers in blue at

the bottom. At 1.4541, wave C

is equal to 1.618 multiplied by

the length of wave A. Where

are we? We are at 1.4528. Here

is evidence that wave C may

be over. We have gone a little

bit past it.

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Chapter 3 Fibonacci Analysis of Euro/U.S. Dollar Foreign Exchange

Figure 67

Lets see if we have any other

evidence. Within wave C, we

look at waves (1) through (3).

We take the net distance traveled

of waves (1) through (3) which

is point R to point S and then

expand that downward from

the end of wave (4). We find

that at 1.4521, wave (5) of C

equals .382 multiplied by the net

distance traveled of waves (1)

through (3). That gives us an-

other point or clue. Remember,

we hit 1.4528. So again, it looks

like wave iv in brown is over.

Figure 68

Lets just look at time. These are

not days or weeks this is the

15-minute bar. The red numbers

at the bottom are the number of

15-minute bars. I am looking

to see if within wave C, which

is five waves down, if there is

a Golden Section with respect

to time. It is close. The end of

wave (3) does form a Golden

Section with respect to time.

The first half is .618 and then

the next time frame is .382 with

a few more 15-minute bars. As

you can see, we are not that far

away from forming that Golden

Section.

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Chapter 3 Fibonacci Analysis of Euro/U.S. Dollar Foreign Exchange

Figure 69

Here is the Fibonacci price

cluster that we discussed. Re-

member that wave iv in brown

retraces .382 of iii in brown at

1.4523. We looked at the C

wave within iv and compared

it to 1.618 times A, and we got

1.4541. We looked at wave (5)

of C as it relates to .382 times

waves (1) through (3), and we

got 1.4521. So, we have a lot

of evidence to tell us that wave

iv has either ended or is near to

ending.

We are going to set the stop

somewhere below the 1.4523

level and that would at least be

in that previous fourth wave in

the 1.4519 area. So, lets set our

stop somewhere down below

1.4519 for going long.

Price Targets

Figure 70

Lets look at price projections.

We measure waves i through

iii in brown and then expand

that from the end of wave iv.

We find that if wave v ends at

1.4977, wave v will equal .618

multiplied by the net distance

traveled of waves i through

iii. So, 1.4977 is an important

price target.

How You Can Identify Turning Points Using Fibonacci Part 2 2008 Elliott Wave International www.elliottwave.com 37

Chapter 3 Fibonacci Analysis of Euro/U.S. Dollar Foreign Exchange

Figure 71

Now lets look at some Fibo-

nacci dividers. Look at the end

of wave iv at 1.4528. If wave v

ends at 1.5023, the entire price

range will be divided exactly

in half, 50%-50%, at the end

of wave v. We would have a

Golden Section at 1.4834. That

is a little bit lower than what

we have been looking at. Re-

member, we have 1.4977 and

1.5023. But we will keep 1.4834

in mind. I did not put in the

.382 and .618 on the chart, but

this analysis says that if wave v

ends at 1.4834, we would have

a Golden Section.

Figure 72

Now we are going to the next

higher degree. We measure

waves (i) through (iii) and ex-

pand that from the end of wave

(iv). We find that if wave (v)

ends at 1.4965, it is on parity

with (i) through (iii) instead of

just (i). Normally, parity is when

you have an extension for one

of the other waves, but it is the

closest thing we can find. It is

not a .618 or a 1.618 and so on,

but we will make note of that.

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Chapter 3 Fibonacci Analysis of Euro/U.S. Dollar Foreign Exchange

Figure 73

We see that the end of wave

(iii) forms a Golden Section at

1.4878 for wave (v).

Figure 74

Lets summarize these relation-

ships. We have a Fibonacci clus-

ter made up of 1.4977, 1.4965,

1.5023, and 1.4878. When we

average all of those together,

we end up with a price target

of 1.4935 for v in brown of (v)

of 8.

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Chapter 3 Fibonacci Analysis of Euro/U.S. Dollar Foreign Exchange

Time Targets

Figure 75

Lets look at time. Notice the

.618 at the end of wave iii or the

beginning of wave iv. It makes

a Golden Section if this entire

move ends on November 30.

Figure 76

I tried to look at some others

here with respect to time like

the .382 or the .5 but they just

did not work. They would just

move it further over. Remember,

right now we are on November

13. If there is a Golden Section,

this is telling us to look for No-

vember 30.

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Chapter 3 Fibonacci Analysis of Euro/U.S. Dollar Foreign Exchange

Figure 77

Here we expand. We are looking

at the total distance of waves i

through iii and expanding that

from the end of wave iv. What

do we find if we expand that by

.382? That comes out to a target

of November 26. So, we will

keep that date in mind.

Figure 78

If the whole move starting from

the end of wave (iv) to wave (v)

up at the top lasts a Fibonacci

34 days, then that, too, is No-

vember 26.

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Chapter 3 Fibonacci Analysis of Euro/U.S. Dollar Foreign Exchange

Figure 79

Now we go up one degree. Look

at the beginning of Minute wave

8 in blue and the Minuette

wave (iv) in red. See how wave

(iv) divides the entire time

length of Minute wave 8? If

wave (v) ends on November 29,

then wave (iv) makes a 50%-

50% split.

Figure 80

One other thing: If I am look-

ing at just a Fibonacci number

of days, I get 89 days. So, that

takes us out to December 19,

which is pretty far. We will keep

that in the back of our minds.

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Chapter 3 Fibonacci Analysis of Euro/U.S. Dollar Foreign Exchange

Figure 81

Here is a summary of the time

clusters. I will repeat these just

to make sure you get this. The

first one says that the end of

wave iii in brown forms a Gold-

en Section .618-.382 if wave

v in brown ends on November

30. Wave v equals .382 of a

move from i to iii if it ends on

November 26. November 26 is

a Fibonacci 34 days for waves i

through v in brown. The last one

is that the end of wave (iv) forms

a 50%-50% split 50 percent

on each side of wave 8 in blue,

if wave (v) ends on November

29. So we have November 26,

29 and 30.

Figure 82

There is one more thing I want

to look at, at higher degree with

respect to time. If we start from

the end of wave 7 in blue,

measure waves (i) through (iii)

and extend that from wave (iv),

we get a Fibonacci 1.618 at

December 20. We will have to

keep that in mind. If this move

does not end around the end of

November, then we are looking

toward the end of December.

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Chapter 3 Fibonacci Analysis of Euro/U.S. Dollar Foreign Exchange

Figure 83

Another thing: We have drawn

in our channels. We have a long-

term channel for waves (i), (ii),

(iii), and (iv), right? Then the

green lines show the short-term

channel for waves i, ii, iii and iv

in brown. Notice that the lower

channel lines intersect at the end

of wave iv. As we go up, if we go

beyond the blue channel, then

we will look for the short-term

channel. Again, I connect (ii)

and (iv) and draw a parallel line

that includes wave (i), because

wave (iii) is steep.

We are going long at 1.4584 on November 13. That level is the middle of the price range.

We put our stop down to 1.4510 that is below the .382 Fibonacci level. It is within the area of the

previous fourth. Hopefully, it will not get tested.

The price target is 1.4935, which is an average of prices in the cluster.

Our time target is from November 26 to November 30.

Our potential risk is 74 points, and our potential reward is 351 points.

The red box at the top of the chart represents our target with respect to time and price. So, we are look-

ing to come right into that box, which is right on one of the blue channel lines and is also in between

those two green channel lines.

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Chapter 3 Fibonacci Analysis of Euro/U.S. Dollar Foreign Exchange

Conclusion

Figure 84

We have now moved forward

in time, and, fortunately, we

are moving up. We can raise

our stop level. On November

22, 2007, which is at the end

of the chart, we make a high of

1.4880. The low is 1.4827. We

have not reached our time target

or price target of 1.4935, but we

are coming very close. Unlike

the Starbucks scenario, we are

not going to wait too long, but

lets go a little bit further in time.

Keep in mind that November 23

is a Friday, and November 26

therefore is a Monday.

Figure 85

We are still moving up. So, now

it is Friday, November 23. We

have met our price target. The

high is 1.4977 that should ring

a bell. That is where wave v in

brown is equal to .618 multi-

plied by i through iii. Now, why

arent we in the box? We are on

November 23, and the box starts

at November 26. We are just

one day from our time cluster.

I say we get out. We went past

the longer-term channel, but we

are almost hitting the short-term

channel. We have met just about

everything. So, unlike Star-

bucks, we are not going to wait

another day. Now, of course, we

could have left an order with the

broker to get us out at 1.4935

that was another option. But the

way I approach this is by taking

it day-to-day.

How You Can Identify Turning Points Using Fibonacci Part 2 2008 Elliott Wave International www.elliottwave.com 45

Chapter 3 Fibonacci Analysis of Euro/U.S. Dollar Foreign Exchange

Figure 86

So, we are going to get out in

the middle of the current range

at 1.4882; that is a profit of 298

points. We are going to call this

v of (v) of 8. We can see a five-

wave structure within v (labels

and degree not shown on chart):

1, 2, 3, 4 and 5, and we are not

going to wait another day.

Figure 87

Here is what happens after that.

This is the aftermath. The Euro/

USD, indeed, made a dramatic

move to the downside for Min-

ute wave 9 in blue. Now, in this

case, if we had waited another

day or two, it would not have

killed us; but it was the right

place to get out. We had all the

evidence.

That concludes this session on

the trading scenarios, and now

I will answer a few of your

questions.

How You Can Identify Turning Points Using Fibonacci Part 2 2008 Elliott Wave International www.elliottwave.com 46

Chapter 4: Questions and Answers

Here are some selected questions and answers that followed the second part of Wayne Gormans original

presentation of How You Can Identify Turning Points Using Fibonacci Part 2 on March 19, 2008.

Q.: When projecting the Golden Section dividers, why use the end of wave 4 for price but use the begin-

ning and sometimes the end of wave 4 for time?

Gorman: Because the guideline applies to both. If you recall from one of the slides we had [in part 1],

for Golden Sections or for 50-50 splits, sometimes its the beginning of wave 4 that gives us a good target

and sometimes its the end of wave 4. So, youve got to look at both and then make a judgment call as to

which one is giving you more useful information.

Q: Would you have considered reversing your position when you exited on the Euro?

Gorman: Yes, thats a good point, but I had to stop the scenario somewhere. If I just kept going, wed

be here for another hour. But, yes, you had enough data to start thinking about not only getting out, but

going short.

Q; In Cocoa, why did you consider wave c of B a possible ending diagonal? There was so much con-

solidation.

Gorman: I based it more on the fact that wave c was basically equal or slightly longer than wave a,

and that a 1.618 relationship would have gone too far, and that wave B had retraced to .618. So, it was a

combination of evidence. It wasnt just one thing, but it had the right look.

Q: Time and price confluence raises confidence in high probability turning points. Do you weight your

trades or strictly position size?

Gorman: No, I would position a certain size based on my risk tolerance, in terms of managing my capital

and do a little bit of risk management in the sense of looking at what a several standard deviation move

might be overnight and calculating with a certain confidence interval what my value at risk is or earn-

ings at risk on a trade. I wouldnt weight them.

How You Can Identify Turning Points Using Fibonacci Part 2 2008 Elliott Wave International www.elliottwave.com 47

Chapter 4 Questions and Answers

Q: Ive heard many times that trading is 99% psychological, such that, even with the best methods,

emotions get in the way. Is this a problem for you, too?

Gorman: Well, sure, yes. Its hard to keep your emotions in check and be objective. I think one of the best

ways to do that is certainly not to risk more than you feel comfortable losing. Otherwise, if youre taking

a larger risk, thats going to start getting your emotions going. And so, it is difficult. You really have to be

like a surgeon and be cool and calm about it, and just constantly be aware of your emotions.

Q: If someone is interested in pursuing your approach further, what first steps would you recom-

mend?

Gorman: I would certainly get the book, Elliott Wave Principle, which states all the Elliott rules and guide-

lines. I would look into taking some of our on-line courses. We have a whole library of on-line courses.

This course is just one of many. You may want to start with the Basics course and then work from there.

Just getting through Elliott Wave Principle will be a big task, too. Theres a lot there.

Q: If youre trading individual stocks, do you need to trade stocks with a longer history, for example,

IBM? Or would Google work?

Gorman: No, Google works. Ive been looking at Google. As a matter of fact, Ive been looking at a lot

of stocks that were IPOs recently, meaning over the last few years, because Id like to do a course on how

to trade individual stocks. Starting when they were IPOs, in other words, when a stock is born, how do

you know where you are in the wave count? Even with stocks that just became new companies in recent

years, you can pick up the wave count. And even if you cant go back years or decades, thats okay. You

look for things that you can recognize like a triangle. If you see a triangle you know that triangles are

normally in wave 4, so you immediately know that it looks like this IPO started in wave 4, and you go

from there.

Q: Does Elliott wave analysis apply best to stocks that have large volume?

Gorman: Well, yes, when it comes to individual stocks, it can be more difficult. I mean, it just depends

on the stock and, certainly, if theres better volume, thats going to help. In general, of course, the indexes

are better. But as weve seen with Starbucks and thats another reason I wanted to show that you can

use Elliott wave for individual stocks. Certainly, the ones that are more highly traded will display clearer

Elliott waves.

How You Can Identify Turning Points Using Fibonacci Part 2 2008 Elliott Wave International www.elliottwave.com 48

Chapter 4 Questions and Answers

Q: Did the bank where you worked ever teach you the real trading secrets?

Gorman: My recollection is, at least back then in the 80s and 90s, that you were left to your own devices,

and nobody really told you anything. You were just thrown in there, and you had to just learn on your

own. If they did teach you anything, it was more about macroeconomics it was the standard economic

fundamentals: money supply, CPI, job data, etc.

Actually, this is a good question because it raises a point that I always think about when I look back. With

Elliott wave, whats the underlying theory of the wave pattern? Its that people herd. What causes all this?

In the aggregate, people engage in what we call if you really want to get technical about it unconscious

herding. People follow the decisions of others. They herd and everyone then follows what everyone else

is doing. You get this herding process.

Following others, thats what youre taught, usually when youre young and youre working for an institu-

tion. I remember that I was taught to find out what everyone else was doing and make sure I was doing the

same. What I found was that it was not the road to success, to just follow others. You had to be an inde-

pendent thinker. We were literally told every day to call around and find out what other traders were doing

and then decide what to do based on that. I found that didnt work, and the economic fundamentals did not

work either. Thats why I started using Elliott wave back in 1986 and have been using it ever since.

How You Can Identify Turning Points Using Fibonacci Part 2 2008 Elliott Wave International www.elliottwave.com 49

EWI eBook

Part 2: How To Use Fibonacci Relationships To Set

Trading Strategy

Post Office Box 1618

Gainesville, Georgia 30503 US

www.elliottwave.com

ISBN: 978-0-932750-80-8

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