Rand Targets Key Fibonacci Levels

This year is certainly turning out to be a humdinger for the Rand – surprising exporters and importers, investors, economists and apparent pundits with the extent and volatility of its moves, which appeared to culminate with the high of 10.36 against the Dollar in June – its worst levels since March 2009.

Since then we saw a couple of months of consolidation above the 9.60 level, but just when many were starting to feel that things were settling down again, the market has again taken off to make new mult-year highs

The ongoing question: How far will it go?

While mainstream analysts will look to news, economic data, Central banker statements and socio-political events for direction, there is a Law of Nature that will give us a far better and accurate idea. The simple, yet profound, reason for this is that there are laws that govern market fluctuations.

Just as the sun and the planets are governed by the laws of Nature, so is man, his activities and actions.

Markets, being a creation of man, reflect man’s law-abiding idiosyncrasies, and the result is harmonious and rhythmic fluctuations that we see in the market in both time and price.

In the 12th century, Italian mathematician Leonardo Fibonacci discovered one of these laws - the amazing relationship of ratio and proportion between a series of numbers, where every sequential number is a sum of the previous two numbers e.g. 1,1,2,3,5,8,13,21,34,55,89,144,233...

Now, if you looked at the relationship between a number in the sequence to the numbers following, the initial ratios in this sequence give us 100% (1 divided by 1) and 50% (1 divided by 2), but when we get on down the sequence a bit, we make a remarkable finding:

 13 divided by 21 = 61.9%
 21 divided by 34 = 61.8%
 34 divided by 55 = 61.8%
 55 divided by 89 = 61.8%
....
 144 divided by 233 = 61.8%

And no matter how much further on, the ratio is the same e.g 2,178,309 divided by 3,524,578 = 61.8%.

Then, if we take a number and compare it to two numbers ahead, we get a ratio of 38.2%, or three ahead, we get a ratio of 23.6% – all Fibonacci ratios. And if we divide a number in the sequence by the one prior, we get a common ratio of 161.8% (referred to as the Golden ratio). Try it for yourself on a spreadsheet!

Amazing, isn’t it?

Well, the truly amazing bit is that these ratios appear everywhere in the physical creation, from the largest galaxies to our very DNA. And perhaps more amazing (to some persons) - this includes financial markets.

Sufficient to say that market fluctuations tend to adhere to these ratios when they extend or retrace, and where there is a cluster of different wave ratios, this is often where a wave will tend to terminate.

To provide some historical examples, and also give a hint of future movements, it is opportune to share the below chart which I updated last week on 22 August 2013. It shows the Dollar/Rand (USD/ZAR) movement since late 2000, which includes the huge price fluctuations movements since that date, which we have labeled Wave A, B and C.

(Click to enlarge)

Note: The whole A-B-C move from 2001 to 2011 has been a correction of the 5-wave move from a low of 0.6667 in June 1974 to the high of 13.85 in December 2001 [labelled as (A) in the Chart].

Now notice how historically the Rand has adhered to Fibonacci ratios of amplitudes between the different waves:

• Wave A, being the first wave of the correction off Wave (A) high, retraced almost exactly 61.8% of this decades long advance
• Wave B, which completed in 2008, retraced almost exactly 76.4% of Wave A.

Almost uncanny, isn't it?

That is the past, but let's look now at some possible target for the current move off the 2011 low using Fibonacci relationships as well as some trendline analysis:

• A 61.8% retracement of Wave A (from Dec 2001 high to Dec 2004 low) gives us a possible price target of 10.7044
• A 76.4% retracement of Wave C (from Oct 2008 high to May 2011 low) gives us a possible price target of 10.6058 (76.4% = 100% - 23.6%)
• If we add some trendline analysis by extending a line joining the highs of 2001 and 2008, this gives us a resistance level just over 10.5000.
• And further, if we draw some channel lines for the move from the 2011 low, this gives us a channel resistance line around 10.6000.

The above give us a price cluster in the 10.50 to 10.71 area, which is a likely target for the current move.

With such a strong confluence of resistance, it is unlikely that this will be breached successfully on the first attempt (at least), and a retracement/consolidation is likely to follow.

Just how strong a rejection we see off this level will give us a good indication for the months following.

Such intriguing stuff this, isn't it, when you realize that there is some underlying Law of Nature that is governing human activities, including markets?

As always, would appreciate your feedback and comments.

To your success~

James Paynter

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