Table Of ContentStocks & Commodities V. 8:11 (429-431): Timing The Bond Market With Elliott And Fibonacci by Roger Farley
Timing The Bond Market With Elliott And
Fibonacci
by Roger Farley
Fibonacci ratio analysis offers the Treasury bond trader an excellent long-term picture of the market. A
rudimentary understanding of the Elliott wave theory and Fibonacci retracements allows bond traders of
any outlook an excellent projection of market objectives and turning points.
Obviously, this approach relies on maintaining a proper wave count. Technicians who have developed a
reliance on other trading tools often shy away from the Elliott wave because of the subtleties involved in
interpreting corrections. As with any other approach, however, a focus on the overall picture sorts out
some of those complexities.
According to Elliott wave theory, the first, third and fifth waves are proportional by the 1 to 1.618 to 1
ratio. The bond market demonstrates this ratio to a remarkable degree in the move from its August 1989
high of 101.08 to the May 1990 low of 88.07 (Figure 1).
Another useful timing tool emerged in the bond market when a corrective fourth wave developed as a
contracting triangle (Figure 2). Contracting triangles are composed of five a-b-c corrections and generally
precede the final move in a market.
The breakout from this triangle is the fifth and final wave of the move. Its minimal objective is measured
from the breakout and equals the widest part of the triangle.
Finally, and most useful from a timing standpoint, Elliott wave practitioners A.J. Frost and Robert
Prechter propose that their experience with triangles suggests that:
[Often] the time at which the boundary lines of a previously formed triangle converge at its apex
coincides exactly with a turning point in the market. Perhaps the frequency of this occurrence would
justify its inclusion among the guidelines associated with the Wave Principle.
Figure 2 shows the triangle formations based on the daily. The wave count objectives can vary between
weekly and daily charts because of the way weeklies are formed. At this point, there are two objectives
for the completion of the trend.
It is important to draw the top boundary line of the triangle by ignoring the overshoot of the fifth or E
Article Text Copyright (c) Technical Analysis Inc. 1
Stocks & Commodities V. 8:11 (429-431): Timing The Bond Market With Elliott And Fibonacci by Roger Farley
wave. According to Frost and Prechter, the wave theory states that it is not unusual for the E wave to
overshoot the trendlinet. The apex of this properly drawn triangle converged on May 4 — the day the
bonds rallied on a bullish unemployment report. As a sidenote, the apex price of 9226 has remained a
pivotal support/resistance level since then.
Retracing 61.8% of the move
Fibonacci retracements of 61.8% in Elliott wave theory can be used in many ways. Too often, market
technicians observe 0.618 retracements in the simplest terms. For example, in a move from $200 down to
$100 for a stock, $162 would be the Fibonacci retracement. So the market watches $162.
It can be much more complex. If the market has demonstrated five waves down, completing wave 1 of a
larger degree (Figure 3 is numbered this way), then wave 2 should pull back to a trendline drawn from
the beginning of the move and through the 0.618 retracement above the bottom of wave (cid:1). So instead of
162 being resistance, use the declining trendline as a sell objective. This way, the time factor is
incorporated into the price trend. Applying it to the bond market: The 61.8% retracement of the move
from 101-08 to 88-07 is 96-09 (Figure 1). Directly above the low of 88-07, mark 96-09. Now, draw a line
from 101-08 through 96-09. The actual retracement was very precise: the week the June bond hit 9510,
the line came in at 9512.
Use the declining trendline as a sell objective. This way, the time
factor is incorporated into the price trend.
So the retracement fell just two ticks short over the course of more than seven points. Currently, this line
is at 9423 for the third week in July, and it is sloped at 4.2 ticks per week.
Short and long term
Maintaining a long-term perspective is the key to successful trading. An ill-founded objection to the
Elliott wave approach complains that the complexity and uncertainty of shorter-term wave counting
makes wave analysis useless to the novice wave analyst.
My experience belies that conception. What began as research into auxiliary tools to complement my
shorter-term proprietary bond trading techniques led to a profound respect for the tenets of the Elliott
wave approach.
Roger Farley is head trader at TBJ Trading Co., a private trading firm specializing in the financial
markets.
Frost, A.J., and Robert Prechter [1985]. Elliott Wave Principle, New Classics Library.
Lamarr, David [1988]. "Trading with Elliott Wave and Gann," Technical Analysis of Stocks &
Commodities: Volume 6, February.
MacDowell, C.R. [1990]. "Elliott wave dilemma: Bull or bear market?" STOCKS & COMMODITIES, January.
Prechter, Robert [1980]. The Major Works of R.N. Elliott, New Classics Library.
Figures Copyright (c) Technical Analysis Inc. 2
Stocks & Commodities V. 8:11 (429-431): Timing The Bond Market With Elliott And Fibonacci by Roger Farley
FIGURE 1 : According to Elliott theory, the first third and fifth waves are proportional by the 1 to 1.618
to 1 ratio. The bond market demonstrates this ratio in the move from its August 1989 high of 101.08 to
the May 1990 low of 88.07
FIGURE 2 : The objective for wave 5 based on the triangle is the distance between A and B subtracted
from the penetration of the lower trendline. Contracting triangles are composed of five a-b-c corrections
and generally precede the final move in a market.
Figures Copyright (c) Technical Analysis Inc. 3
Stocks & Commodities V. 8:11 (429-431): Timing The Bond Market With Elliott And Fibonacci by Roger Farley
FIGURE 3 : if the market has demonstrated five waves down, completing wave 1 of a larger degree,
then wave 2 should pull back to a trendline drawn from the beginning of the move and through the
0.618 retracement above the bottom of wave 1.
Figures Copyright (c) Technical Analysis Inc. 4
