The FearGreed.com Approach to the Markets
Leonardo Pisano better known by his nickname ,Fibonacci, published Liber abaci in 1202 in which he posed the following problem: A certain man puts a pair of rabbits in a place surrounded on all sides by a wall. How many pairs of rabbits can be produced from that pair in a year if it is supposed that every month each pair begets a new pair, which from the second month on becomes productive.
The resulting sequence is 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, ... each number in the series is the sum of the two numbers preceding it. He also discovered that each number in the sequence is 1.618 times the preceding number and .618 of the next number.
Market Technicians
Many technicians use the Fibonacci numbers when trying to determine support and resistance, and commonly use .382, .50, and .618 retracements.
It is commonly believed that a .382 retracement from a trend move will tend to imply a continuation of the trend. A .618 retracement implies that a trend change may be in the making. Technicians have adopted many such rules. My approach is different in that I do not use Fibonacci retracement numbers to determine the trend. My long-term trend is determined by a simple 89-period moving average. It is effective from a one-minute chart to a monthly chart. This moving average is the literal battleground between the bulls and bears.
My use of Fibonacci Clusters will determine support and resistance in the direction of the main trend (which is always determined by prices either above or below the long-term moving average) it is what I call my "Main 89 Line." Most charting packages will enable you to create a simple 89-period moving average. I encourage you to look at the market this way.
What are Fibonacci Clusters and how are they different in calculating support and resistance than the standard ratios with which most traders are familiar?
Simply put, Fibonacci Clusters are more accurate because of the use of more data points and the way the Fibonacci ratios are calculated. I include as many as seven swing highs and swing lows in addition to the significant high points and significant low points in the calculations.
Lets review the approach I use to calculate support and resistance levels. The first thing I need to identify is a trend move, i.e. a significant high point to a significant low point or vice versa. These points are the extreme boundaries of the trend. Within these extreme points are contra-trend swing highs within an overall downtrend and swing lows within an overall uptrend. In other words, I look to "capture" the high/low points of a contra-trend move within the longer trend.
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