Mar 27, 2014

Timing a Bear Market



Fibonacci numbers application in the financial markets provide interesting results. Here in this post I am going to share with you extremely interesting method for timing the markets. It is based on the Fibonacci numbers applied for the time scale unlike its traditional use for the value scale of an asset chart.

I am not going to deepen into details about the theory behind the Fibbo sequence but rather its application on S&P500 index bear market timing over period of 27 years. You could get the logic of Fibbo ratio and its use in the posts: Application of Fibonacci Numbers and Stock Market Cycle And Market Peak Projecting (1982-2014).

This method back test showed that timing the beginning of a new bear market could be done with few months accuracy. That considering the time span of 27 years is notable. The logic behind this method is quite simple. Projecting the bear market duration gives certain Fibbo sequence number (1,2,3,5,8,13,21) which correspond with a date. Keeping in mind that average bull market lasts around 5 years the Fibbo number after the fifth year of the bull market is supposed to be the inflection date as then is most likely a bear market to begin. Thus the period around that projected date is most likely to be the market direction turning point. 

Looking the charts proves that. The bear market started Aug 1987 continued until Dec 1987. Projecting that period, the Fibbo number after the fifth year of the following bull market (started Dec 1987) was 21 which coincided with Aug 1993 on the time scale. The actual bull market termination was Jan 1994. Based on the bear market duration of 5 months the Fibbo time zone indicator showed that bull market should end Aug 1993. The accuracy here was 6 months.(see the chart).

Timing A Bear Market Using Fibonacci 1987-1994
Timing A Bear Market Using Fibonacci 1987-1994
The bear market started Jan 1994 lasted until Dec 1994. That month was the beginning of a new bull market. The bear market Fibbo projected number after the fifth year (1999) of that bull market appeared to be Sept 2000. Actually the market consolidated since March 2000 and the real drop started in Sept 2000. Here the accuracy was 6 months as well.

Next bear market, started March 2000, was one of the longest among recent market cycles. It lasted until Oct 2002. Fibbo time projection of that period after bull markets' fifth year appeared to be number 3 or the line coinciding with Oct 2007. The actual bear market started exactly on that date. Here the timing was with high accuracy.

Timing A Bear Market Using Fibonacci 1994-2014
Timing A Bear Market Using Fibonacci 1994-2014
Currently we are in the fifth year of latest bull market and the logical question is when the current market will end its bull run? The 2007 bear market, which still reminds of itself, finished in March 2009. Its Fibbo projection after the bull markets' fifth year (2014) is the number five in the sequence which correspond to Sept 2014.

Thus according to the Fibonacci time zones ratio the end of the current bull market is going to happen in Sept this year. Of course as back test experience shows there is possibility of several months deviation. 

Whether the market will undertake major turn nobody knows however the combination of maturing bull market, termination of the QE and other fundamental factors could prove the accuracy of the Fibbo time zone indicator again.   

By Detelin Y.

More on Markets and Forecasting

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