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Checking the Charts with a Middle Ages Mathematician

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BY: HANS ALBRECHT, CIM®, FCSI, VICE-PRESIDENT, PORTFOLIO MANAGER AND OPTIONS STRATEGIST, HORIZONS ETFS

February 7, 2019

The S&P 500 Index has climbed the ‘wall of worry’ impressively so far in 2019. It went from the worst December since the Great Depression to the best January since 1987. Confused? If “yes”, join the club with investors and advisors alike. It’s hard to argue with a bounce like this, but the rest of February should be interesting based on what I’m seeing on the charts. The S&P 500 has just rallied back to the 61.8% Fibonacci retracement level. Fibo-what?

Fibonacci, for the few of you who for some reason don’t follow the origins of obscure trading indicators, was an Italian mathematician who lived about 900 years ago. His ‘Fibonacci Sequence of Numbers’ is an observation of a numerical pattern that repeats throughout nature. Quite simply, the sequence involves obtaining each successive number by adding the two previous numbers in the sequence. Today, it even guides traders and investors in measuring market movement as a series of waves that are similarly quantifiable over time.

If we see the large selloff in the S&P 500 late in 2018 as Wave 1, then by Fibonacci’s system, Wave 2, the rally since then, should extend to about 61.8% of Wave 1’s move. This is sometimes referred to as the Golden Ratio. Long story short – we’re there.

From a bullish standpoint, I do like that the S&P 500 has broken a larger down-trend line as shown in green in the chart below. Sometimes this kind of breach is necessary in order to shake out any remaining nervous-Nellie shorts. From here, earnings will continue to matter, as will the relationship between China and the U.S., and perhaps most importantly of all – Fed policy. But Fibonacci is putting us on high alert that the next big move may soon be upon us, and it could very well be down.

The S&P 500 Index, From December 18, 2017 to February 1, 2019

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Source: Thomson One.

The views/opinions expressed herein may not necessarily be the views of Horizons ETFs Management (Canada) Inc. All comments, opinions and views expressed are of a general nature and should not be considered as advice to purchase or to sell mentioned securities. Before making any investment decision, please consult your investment advisor or advisors.

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