Fibonacci retracements and extensions are commonly associated with Elliott Wave Analysis, a technical approach I have studied but do not personally use. Numerous traders, like me, apply Fibonacci tools independent of Elliott Wave, while an equal (if not greater) number argue that Fibonacci analysis is inconsistent and unreliable, and will assign any perceived relevance to borderline mysticism.
Adam Grimes, author of The Art and Science of Technical Analysis, and a technician I respect, holds this view quite adamantly. Furthermore, through the process of studying for the CMT (Chartered Market Technician) designation, with nearly 2,000 pages contained in the curriculum over three levels, I have been perplexed by the relatively modest mention of “Fib” ratios, particularly given its prevalence amongst technicians. Why is Fibonacci not considered to be foundational, and why the strong polarity of opinions amongst technicians?
If we revisit the $AVB chart below, and use the shelf following the blow-off spike as the start of the Fibonacci retracement, the picture finally comes into focus. Five key pivot points and a key area of consolidation align precisely with Fibonacci ratios. The breakout of the shelf (or the secondary high), which was initially tested and strongly rejected, became the definitive break on the chart. The retest of the breakout of the $193 level became the ideal entry point, right at the beginning of the move higher and before future buyers waiting for a breakout of all-time highs at the peak (~$199). This trade entry dramatically improves the risk-reward profile. Therefore, by focusing the Fibonacci ratios into areas of precision, you can increase the predictive value of the analysis. Simply put: the picture becomes clearer if you adjust the focus of the lens.
Charts made with Optuma Software