When Time Is on Your Side

 | Aug 06, 2014 | 9:00 AM EDT  | Comments
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Stock quotes in this article:

cost

,

tsla

Many of you are familiar with applying Fibonacci ratios on the price axis of the market but may be less familiar with how you can time the market using these ratios.

So, how should we look at Fibonacci time cycles?

In the same way that I look for a clustering of Fibonacci price relationships, I also look for that clustering effect with timing. If I see at least three time cycles coming together within a relatively tight time range, I look for a possible reversal of whatever the market is doing into those cycles. For example, if we are trading lower into a time window, I look for a tradable low and reversal back to the upside. It is ideal to use this type of timing work when it matches up with what the work is saying on the price axis. I believe the quote from W.D. Gann is, "When time and price come together, change is inevitable."

Of course, timing cycles do not always produce a change in trend as anticipated in the same way support or resistance is not always going to hold. It does, however, produce a change often enough to warrant watching these cycles very carefully. Let's look at previous case in Costco (COST).

Costco (COST)
Source: Dynamic Trader

With the timing cycles I will actually measure the time between key swing high and low combinations and then project forward in time using the Fibonacci ratios to look for a coincidence. You can actually test the mathematics yourself if you want to. In the case of COST, I had the coincidence of six Fibonacci time cycles that came due between June 24-25. The cycles from top to bottom were:

  • 0.618 May 12 high - June 9 high (June 25)
  • 100% March 21 high - April 7 low projected from the June 9 high (June 24)
  • 100% Feb. 28 high - April 28 high (June 24)
  • 1.272 May 7 low to May 29 low (June 25)
  • 1.618 April 7 low - May 7 low (June 25)
  • 1.618 Feb. 4 low - April 7 low (June 25)

So the cycles came in June 24-25, and I always give it plus or minus a day of the cycles as far as the "time window" that I will watch for a possible change in trend. The actual low in this case was made on June 23, which was within the "time window" for a tradable low to develop. Honestly, I was concerned about a failure of these cycles when we closely retested the June 23 low, but they did end up holding. This cycle low became a definition of risk. As long as price held above it, I knew there was upside potential and that my risk was defined below the June 23 low.

At the same time that this low was made, COST tested and held key price support. Time cycles can both help define our risk and manage any market positions. For example, if I have a position in the market and I see timing cycles coming up, it is a cue to me to tighten stops just in case the cycles kick in for a reversal. I hope this helps to explain what I'm actually looking for when I analyze a particular stock. As I've written in the past, this does not work 100% of the time, of course, but when it does work, it is a beautiful display of market geometry.

One more recent example of a time cluster is in the chart of Tesla (TSLA) below. Here the cycles came due July 18-22. The actual low in that case was made on July 17. I hope this helps you to understand that the method to my madness. I will illustrate these cycles again in future commentaries.

Tesla (TSLA)
Source: Dynamic Trader

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