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THE MARKET WHISPERER 21 7

Followers of the “golden ratio” theory will claim that the ratio is highly
common in art and architecture. In actuality, it is a little difficult to prove

or refute this claim, chiefly because of the difficulty in measuring it. Among

buildings claimed to have been structured according to the golden ratio

are the ancient pyramids of Giza, the Athenian Parthenon, and even the

Dome of the Rock in Jerusalem. Since the pervading opinion for many

years now is that the golden ratio is the most proportionate and hence

attractive balance perceived by humanity, architects and artists have

adopted it in their works of art and structures. It is known that Leonardo

da Vinci applied it to several of his most famous works, among them the
facial features of the Mona Lisa.

So just what is the connection between rabbits, culture and art, and
stock trading? The trader Ralph Elliott published a theory in 1932 known
as the “Elliott Wave Principle.” I won’t describe the theory in full detail,
since I do not consider it important for short-term stock traders, but will
mention that according to this theory, the most common ratios between the
market waves are 38.2%, 50% and 61.8%, the latter being the golden ratio.
Being able to recognize this ratio assists in estimating how the next wave
will look, and determining the appropriate entry and exit points. From that
time on, the golden ratio in short-term trading also grew in importance, as
will be explained further.

Main Application: Price Correction
The main application of the Fibonacci ratio in short-term stock trading

is to calculate price correction: for example, take a stock that has reached

its high and begins to return downward. Where will it find support?
According to the Fibonacci ratio, that should occur at several points: when
it drops 31.2% from the high, 50% from the high, and 61.8% from the high.
So if the stock rose by one dollar, it should find significant support if and
when it drops by 31 cents, 50 cents, or 62 cents from its high. The view
is that buyers will wait for the Fibonacci correction and buy based on the
assumption that the Fibonacci point is the point of support. The opposite
will be true for a stock trending down and returning upwards.

In light of the great many Fibonacci aficionados, I must admit that very
often, the ploy succeeds. But as you may have understood from the tone
of my remarks, I am not counted among this indicator’s followers. On the
other hand, we should never argue with buyers or sellers waiting patiently

for the designated support point, even if I personally feel the method is