Three Fibonacci rules to label trend versus countertrend

Three construction rules on a completed swing

A completed swing is scored with three construction rules before a trend or countertrend reading is carried forward. Fibonacci retracement, extension, and time counts are then stacked with Elliott wave analysis and wave counting so a labeled impulse or correction can still be treated as incomplete.

How the chart ratios are derived

Adjacent Fibonacci numbers sum to the next number, and dividing a term by the prior term approximates 1.618. From that relationship, ratios such as 0.382, 0.5, 0.618, 1, 1.5, and 2.618 are derived for chart work.

Rule one: retracement depth

The first construction rule uses Fibonacci retracement. A move that retraces no more than 61.8 percent of the prior swing is treated as consistent with a continuing trend. A move that exceeds that level is treated as consistent with a countertrend or trend-change hypothesis.

In the S&P 500 example, a spring 2008 recovery of about 200 points after a drop of more than 300 points stalled within a handful of points of a 61.8 percent retracement of the prior downswing and then reversed.

Rule two: same-direction extensions

The second construction rule measures the length of the next impulse against the prior impulse of the same direction. The 1.618, 2.618, and 4.236 extensions are used as candidate completion zones.

In that same S&P 500 construction, the later decline approached a 1.618 extension of the first downswing near 1270 and then a 2.618 extension near 750, with the 2009 low forming just above the second zone.

Rule three: swing duration

The third construction rule uses Fibonacci numbers as candidate durations for a swing. A move that has already consumed a sequence number of bars is treated as nearer a completion test than one that has not.

On the illustrated daily S&P 500 downswing, the first decline lasted 21 days, the bounce 13 days, and the next decline 89 days, matching Fibonacci counts used to time the structure.

Stacking the rules with wave labels

The three rules are meant to be stacked with Elliott wave analysis. Wave counting assigns the impulse or correction labels. Fibonacci retracement, extension, and time counts then constrain whether a labeled impulse or correction is still incomplete.