Ah, Golden Ratio

Ah, Golden Ratio.











The SP500 emini index dropped 35.50 points on Friday, October 19th 2007. A very good move down on a trend day. This market tested a low at exactly 1505, which happens to be a .618 of the recent move up we have seen since early September.

Why is .618 so significant? It is the Golden Ratio or phi.

In mathematics, nature, and the arts, two quantities are in the golden ratio if the ratio between the sum of those two quantities and the larger one is the same as the ratio between the larger one and the smaller. The Golden ratio is approximately 1.6180339887

The golden ratio is the limit of the ratios of successive terms of the Fibonacci sequence, therefore if a number of the Fibonacci sequence is divided by its immediate predecessor in the sequence, the quotient approximates to 1.618

In nature, the golden ratio can be seen in the spiral of sea shell shapes, branching plants, flower petal and seeds, leaves and petal arrangements amongst many other naturally occuring phenomena.

Is this a coincidence? Here is a challenging exercise for you. Take a chart of any particular index market that you like, Dow Jones Index, SP500, Russell, whatever; and see for yourself how recurrent this number appears on the price chart. Compare the up and down swings on any particular timeframe that suits you with 61.8% in mind. You may be surprised to find how recurrent this number appears in the markets!