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Equity Prices- Application of Fibonacci Numbers (A study of India, Singapore, Taiwan,South Korea and Hongkong) Authors:Dr. N. S.

Malik Faculty, Haryana School of Business, Email:- nsmalik2002@yahoo.com Rajat Singla Student, MBA (Finance), Haryana School of Business, Email:- rajsingla007@gmail.com Ph. +91925742555

Equity Prices- Application of Fibonacci Numbers (A study of India, Singapore, Taiwan, South Korea and Hong Kong) Abstract This paper is mainly aimed to make a prediction about the equity indices of the various markets by using Fibonacci technique. The predictions made are totally based on the Fibonacci numbers. The main aim of this paper is to predict the prices and then to find the reasonable opportunity for the purpose investment as well as to take the proper decision regarding the withdrawal of their investment from the market. This prediction has its own success rate based on the predictor experience. Introduction The most widely used process to analyze investment decisions particularly in financial assets fall into two very broad categories: fundamental analysis and technical analysis. Fundamental analysis involves analyzing the characteristics of a company in order to estimate its value, however, Technical analysis takes a completely different approach; it doesn't care one bit about the "value" of a company or a commodity for short period. Technicians (also called chartists) are always looking for predicting the possible movement in the prices of the concerned assets/securities primarily based on the historical price trends. Despite all the fancy and exotic tools it employs, technical analysis really just studies supply and demand in a market in an attempt to determine what direction, or trend, will continue in the future. In other words, technical analysis attempts to understand the emotions in the market by studying the market itself, as opposed to its components. If you understand the benefits and limitations of technical analysis, it can give you a new set of tools or skills that will enable you to be a better trader or investor. The field of technical analysis is based on three assumptions which are:- The market discounts everything, Price moves most of the times in random and History tends to repeat. Fundamental Vs. Technical Analysis Technical analysis and fundamental analysis are the two main schools of thought in the financial markets. As we've mentioned, technical analysis looks at the price movement of a security and uses this data to predict its future price movements. Fundamental analysis, on the other hand, looks at economic factors, known as fundamentals. Let's get into the details of how these two approaches

days or even minutes. a technical analyst approaches a security from the charts. In this approach. etc. Furthermore. the criticisms against technical analysis and how technical and fundamental analysis can be used together to analyze securities. Also remember that fundamentals are the actual characteristics of a business. Technicians believe that all the information they need about a stock can be found in its charts. an analyst attempts to measure a company's intrinsic value. Part of the reason that fundamental analysts use a long-term timeframe. believe there is no reason to analyze a company's fundamentals because these are all accounted for in the stock's price. fundamental analysis often looks at data over a number of years. cash flow statement and income statement. so when a fundamental analyst estimates intrinsic value. but the goals of a purchase (or sale) of a stock are usually different for each approach. in some cases. investment decisions are fairly easy to make . The different timeframes that these two approaches use is a result of the nature of the investing style to which they each adhere. the numbers that a fundamentalist analyzes are only released over long periods of time. Not only is technical analysis more short term in nature that fundamental analysis. on the other hand. therefore. New management can't implement sweeping changes overnight and it takes time to create new products. Fundamental analysis takes a relatively long-term approach to analyzing the market compared to technical analysis. It can take a long time for a company's value to be reflected in the market. technical analysis is . a gain is not realized until the stock's market price rises to its "correct" value. but that the price of a particular stock will correct itself over the long run. This "long run" can represent a timeframe of as long as several years. Yet there are some differences in both of the above which are:At the most basic level. Technical traders. is because the data they use to analyze a stock is generated much more slowly than the price and volume data used by technical analysts. While technical analysis can be used on a timeframe of weeks. In financial terms. Financial statements are filed quarterly and changes in earnings per share don't emerge on a daily basis like price and volume information. This type of investing is called value investing and assumes that the short-term market is wrong.if the price of a stock trades below its intrinsic value. supply chains.differ. In general. it's a good investment. By looking at the balance sheet. a fundamental analyst tries to determine a company's value. marketing campaigns. Although this is an oversimplification (fundamental analysis goes beyond just the financial statements) for the purposes of this tutorial. this simple tenet holds true. while a fundamental analyst starts with the financial statements.

it's not always this easy to see a trend: . Investors buy assets they believe can increase in value. some technical traders might look at fundamentals to add strength to a technical signal.used for a trade. By timing entry into a security. the gains on the investment can be greatly improved. a technical trader might look to reaffirm his or her decision by looking at some key fundamental data.many market participants have experienced great success by combining the two. Oftentimes. whereas fundamental analysis is used to make an investment. while traders buy assets they believe they can sell to somebody else at a greater price. Take a look at the chart below: Figure 1 It isn't hard to see that the trend in Figure 1 is up. this situation occurs when the security is severely oversold. For example. The meaning in finance isn't all that different from the general definition of the term .the oil and water of investing . For example. there are certainly benefits to at least understanding both schools of thought. some fundamental analysts use technical analysis techniques to figure out the best time to enter into an undervalued security. having both the fundamentals and technical’s on your side can provide the best-case scenario for a trade. Alternatively. if a sell signal is given through technical patterns and indicators.a trend is really nothing more than the general direction in which a security or market is headed. One of the most important concepts in technical analysis is that of trend. but it does characterize a difference between the two schools. While mixing some of the components of technical and fundamental analysis is not well received by the most devoted groups in each school. However. Although technical analysis and fundamental analysis are seen by many as polar opposites . Oftentimes. The line between a trade and an investment can be blurry.

but rather in a series of highs and lows. A More Formal Definition Unfortunately. Point 3 is the low that is established as the price falls from the high. In other words. it is the movement of the highs and lows that constitutes a trend. For example. but there isn't a clear indication of which direction this security is headed. In any given chart. defining a trend goes well beyond the obvious. you will probably notice that prices do not tend to move in a straight line in any direction. Point 2 in the chart is the first high. For this . which is determined after the price falls from this point. trends are not always easy to see. while a downtrend is one of lower lows and lower highs.Figure 2 There are lots of ups and downs in this chart. an uptrend is classified as a series of higher highs and higher lows. Figure 3 Figure 3 is an example of an uptrend. In technical analysis.

it's referred to as an upward trend. intermediate trend or a short-term trend. which often move against the direction of the major trend.to remain an uptrend. when each successive peak and trough is higher. the correction is considered to be an intermediate trend. each successive low must not fall below the previous lowest point or the trend is deemed a reversal. you might even say that a sideways trend is actually not a trend on its own. A trend of any direction can be classified as a long-term trend. In any case. There are three types of trend: • • • Uptrends Downtrends Sideways/Horizontal Trends As the names imply. If the peaks and troughs are getting lower. An intermediate trend is considered to last between one and three months and a near-term trend is anything less than a month. When there is little movement up or down in the peaks and troughs. a major trend is generally categorized as one lasting longer than a year. the market can really only trend in these three ways: up. If you want to get really technical. The short-term trends are components of both major and intermediate trends. Along with these three trend directions. Take a look a Figure 4 to get a sense of how these three trend lengths might look. it's a downtrend. In terms of the stock market. down or nowhere. If the major trend is upward and there is a downward correction in price movement followed by a continuation of the uptrend. Figure 4 . it's a sideways or horizontal trend. there are three trend classifications. but a lack of a well-defined trend in either direction. A long-term trend is composed of several intermediate trends.

Drawing a trend line is as simple as drawing a straight line that follows a general trend. The upper trend line connects a series of highs. the interpretation remains the same. weekly charts or daily charts spanning a five-year period are used by chartists to get a better idea of the long-term trend. Figure 5 A channel. Notice how the price is propped up by this support. while the lower trend line connects a series of lows. Daily data charts are best used when analyzing both intermediate and short-term trends. or channel lines. the more important it is. downward or sideways but.When analyzing trends. for example. As you can see in Figure 5. It is also important to remember that the longer the trend. Traders will expect a given security to trade between the two levels of support and resistance until it breaks beyond one of the levels. it is important that the chart is constructed to best reflect the type of trend being analyzed. an upward trend line is drawn at the lows of an upward trend. is the addition of two parallel trend lines that act as strong areas of support and resistance. This type of trend line helps traders to anticipate the point at which a stock's price will begin moving upwards again. A trend line is a simple charting technique that adds a line to a chart to represent the trend in the market or a stock. A channel can slope upward. a downward trend line is drawn at the highs of the downward trend. in which case traders can expect a sharp . This line represents the resistance level that a stock faces every time the price moves from a low to a high. To help identify long-term trends. Similarly. a one-month trend is not as significant as a five-year trend. regardless of the direction. This line represents the support the stock has every time it moves from a high to a low. These lines are used to clearly show the trend and are also used in the identification of trend reversals.

Two important sayings in technical analysis are "the trend is your friend" and "don't buck the trend. Along with clearly displaying the trend. Technical Analysis: Support and Resistance Once you understand the concept of a trend.move in the direction of the break. As long as the price does not fall below the lower line or move beyond the upper resistance. and has remained range-bound for several months. Figure 6 Figure 6 illustrates a descending channel on a stock chart. the range-bound downtrend is expected to continue. It is important to be able to understand and identify trends so that you can trade with rather than against them. This is revealed by the prices a security seldom moves above (resistance) or below (support). the upper trend line has been placed on the highs and the lower trendline is on the lows. or the struggle between buyers (demand) and sellers (supply). The price has bounced off of these lines several times." illustrating how important trend analysis is for technical traders. . the next major concept is that of support and resistance. channels are mainly used to illustrate important areas of support and resistance. You'll often hear technical analysts talk about the ongoing battle between the bulls and the bears.

and KOSPI Composite Index(Korea) Review of literature:- . Wave theory 3. For the purpose of the present study. Resistance. In technical analysis our main concentration is to identify the trend of the movement in the stock prices and it is done with the help of various charts and by using a lot of theories and econometric models. TSEC Weighted Index (Taiwan).As you can see in Figure 7. support is the price level through which a stock or market seldom falls (illustrated by the blue arrows). Hang Seng (Hong-kong). Fibonacci Technique & ratios. Dow theory 2. the Fibonacci technique & ratios have been used for predicting the price movement in the indices namely S&P CNX Nifty (India). on the other hand. In the technical analysis mainly the following types of techniques can be used:1. STI (Singapore). is the price level that a stock or market seldom surpasses. Japanese candlestick 4.

exchange rate predictability is dramatically reduced. Neftci (1991) showed that a few of the rules used in technical analysis generate well-defined techniques of forecasting. the intervention tends to be profitable. Taylor and Allen (1992) report the results of a survey among chief foreign exchange dealers based in London in November 1988 and found that at least 90 per cent of respondents placed some weight on technical analysis. They also show that traders who use information contained in market statistics do better than traders who do not. rather than fundamental. yet. Blume. Easley and O’Hara (1994) show that volume provides information on information quality that cannot be deduced from the price. The rules generated economically significant out-of-sample excess returns for each of six exchange rates. LeBaron (1999) shows that. However. They found that over 85% of respondents rely on both methods and. analysis at shorter time horizons. Lui and Mole (1998) report the results of a questionnaire survey conducted in February 1995 on the use by foreign exchange dealers in Hong Kong of fundamental and technical analyses. but even well-defined rules were shown to be useless in prediction if the economic time series is Gaussian. In a comprehensive and influential study Brock.Brown and Jennings (1989) showed that technical analysis has value in a model in which prices are not fully revealing and traders have rational conjectures about the relation between prices and signals. Weller and Dittmar (1997) use genetic programming to find technical trading rules in foreign exchange markets. if the processes under consideration are non-linear. . over the period 1981–1995. Neely (1997) explains and reviews technical analysis in the foreign exchange market. Frankel and Froot (1990) showed evidence for the rising importance of chartists. then the rules might capture some information. technical analysis was more popular at shorter time horizons. Neely. again. and that 2 there was a skew towards using technical. Tests showed that this may indeed be the case for the moving average rule. after removing periods in which the Federal Reserve is active. when using technical analysis in the foreign exchange market. Lakonishok and LeBaron (1992) analysed 26 technical trading rules using 90 years of daily stock prices from the Dow Jones Industrial Average up to 1987 and found that they all outperformed the market. longterm. Neely (1998) reconciles the fact that using technical trading rules to trade against US intervention in foreign exchange markets can be profitable.

To evaluate the validity of the price predictions using Fibonacci technique. Irwin wrote ‘The profitability of technical analysis: A review’ Park and Irwin (2004). in the absence of trading costs. Cesari and Cremonini (2003) make an extensive simulation comparison of popular dynamic strategies of asset allocation and find that technical analysis only performs well in Pacific markets. Cheol-Ho Park and Scott H. Korea. several technical indicators do provide incremental information and may have some practical value. Neely and Weller (2001) use genetic programming to show that technical trading rules can be profitable during US foreign exchange intervention. Gonz´alez-Martel and Sosvilla-Rivero (2000) apply an artificial neural network to the Madrid Stock Market and find that. Singapore. it is perhaps naïve to work on the premise that ‘bull’ and ‘bear’ markets exist. the technical trading rule is always superior to a buyand. Lee and Swaminathan (2000) demonstrate the importance of past trading volume. Kavajecz and Odders-White (2004) show that support and resistance levels coincide with peaks in depth on the limit order book 1 and moving average forecasts reveal information about the relative position of depth on the book. They also show that these relationships stem from technical rules locating depth already in place on the limit order book. an excellent review paper on technical analysis. but not in a ‘bull’ market. Taiwan & Hong Kong.Lo. Mamaysky andWang (2000) examines the effectiveness of technical analysis on US stocks from 1962 to 1996 and finds that over the 31-year sample period. • • • To predict the price movements in the respective indices under study. Fern´andez-Rodr´ıguez.hold strategy for both ‘bear’ market and ‘stable’ market episodes. . Secondly. Objectives of the study:This study aims to address the following objectives:• To understanding the price movements in indices belonging to India. One criticism I have is that beating the market in the absence of costs seems of little significance unless one is interested in finding a signal which will later be incorporated into a full system. To find if there is any similarity in the application of Fibonacci numbers for predicting equity indices in emerging and/or developed markets in Asia.

technology. For the purpose of the present study daily data on the respective indices have been taken for the period of three years stating 1st January 2006.finance. The data have been sourced from www. The data will be analyzed by dividing the whole into two parts. Singapore. three are emerging markets (India. astronomy and astrology is explained by this property of Fibonacci series. Fibonacci series was discovered by Leonardo Fibonacci Da Pisa who was born around 1170 A. With the help of these techniques and formulas. Taiwan & Korea) where as two are the developed markets (Hong Kong and Singapore). In that world famous book. Taiwan. the Fibonacci numbers are a sequence of numbers named after Leonardo of Pisa. Among these indices.. Fibonacci series was discovered long before there were stock markets and amazingly it works very well in the Stock market as it does with many other natural phenomena. Fibonacci Technique:Fibonacci series is most popular widely used method out of various stock selection methods followed by assets valuer’s and stock market experts around the world. A large number of Stock market technical experts around the world strongly believe that Fibonacci analysis gives highly successful results in predicting the movement of prices. Hong Kong and Korea. As to see the validity of the technique and the success rate chi-square test will be used.Research Methodology:This study will include five indices of India.yahoo.com. A lot of phenomena in nature. (more than 800 years back!). what we now call the Fibonacci series. He became prominent mathematician of that time and is credited with publishing an all time great book on mathematics called Liber Abacci (Book of calculation). science. known as Fibonacci. In mathematics.D. Fibonacci's 1202 book Liber Abaci introduced the sequence to Western European . you can easily catch up major up moves in your list of stocks just before it happens and take advantage of those strong up moves to earn guarantee profits in every trade when ever you identify these moves using Fibonacci techniques and Fibonacci arithmetic formulas. among other things he comes up with a series of numbers.

2 0.666667 Based on the third one 0. 1. 3.20 are:F0 F1 F2 F3 F4 F5 F6 F7 F8 F9 F10 F11 F12 F13 F14 F15 F16 F17 F18 F19 F20 0 1 1 2 3 5 8 13 21 34 55 89 144 233 377 610 987 1597 2584 4181 6765 Above is the Fibonacci numbers in the true sense. For that purpose we can make the relation of such numbers with the previous one or even to the earlier numbers. The first Fibonacci numbers (sequence A000045 in OEIS). the second number is 1. etc.25 Based on 5th one 0. … . and each subsequent number is equal to the sum of the previous two numbers of the sequence itself.125 0.5 0.153846 Based on 6th one 0. The first number of the sequence is 0.333333 0. yielding the sequence 0. In order to find the strong numbers calculations have been made as follows:. 5. 2. it is defined by the following recurrence relation: That is. 1.333333 0.125 0. 8. each number is the sum of the two preceding numbers. also denoted as Fn. for n = 0. although the sequence had been previously described in Indian mathematics.2 0.4 Based on 4th one 0.095238 . In mathematical terms.5 0. 1. after two starting values.076923 0.Some of the strong numbers which this study will used for the purpose of the predicting the equity indices are as under:- Original numbers 1 1 2 Based of consecutives 1 0. But for the purpose of the technical analysis we have to convert these true numbers into the some percentage or in further parts to calculate some strong numbers in order to apply them in the analysis. 2.mathematics.

381963 0.09017 0.6% 4.236052 0.8% 2.090186 0.617978 0.381944 0.236068 0.235294 0.381967 0.381818 0.382 or 38.238095 0.236068 #DIV/0! #VALUE! #DIV/0! 0.090909 0.09017 0. .088235 0.618034 0.145898 0.146 0.381966 0.145899 0.382022 0.618056 0.145455 0.615385 0.381966 0. .236069 0.382353 0. .090129 0.09017 0.618037 0.380952 0.236068 0.618034 #DIV/0! 0.090278 0. .618026 0.618034 0.146 or 14.145898 0.236074 0.145923 0.090172 0.375 0.3 5 8 13 21 34 55 89 144 233 377 610 987 1597 2584 4181 6765 10946 Strong numbers 0.145897 0.146067 0.2% 3.382 0.764 or 76.618034 0.147059 0.142857 0.381966 #DIV/0! #VALUE! 0.236068 0.381966 0.618 or 61.145898 0.09017 #DIV/0! #VALUE! #DIV/0! #DIV/0! #DIV/0! 0.6 0.236111 0.381966 0.236 0.625 0.6% 5.384615 0.090169 0.381966 0. .145833 0.145898 #DIV/0! #VALUE! #DIV/0! #DIV/0! 0.618034 0.145902 0.090 or 9 % 6.618 0.618034 0.4% .618182 0.381974 0.09 By making the calculation the following numbers have been determined:1.230769 0.619048 0.236364 0.235955 0.090164 0.617647 0.089888 0.236068 0. .236066 0.236 or 23.618033 0.145889 0.

982432 903593.016620992 0.648649 896620.205018 Variable 2 4208.2141 37 900106.648649 896620.007776898 0.7519 0 72 -0.Analysis and interpretation:Nifty (India) F-Test Two-Sample for Variances Variable 1 Mean Variance Observations df F P(F<=f) one-tail F Critical one-tail t-Test: Two-Sample Assuming Equal Variances 4204.2898 37 36 Variable 1 Mean Variance Observations Pooled Variance Hypothesized Mean Difference df t Stat P(T<=t) one-tail 4204.490793394 2.493392475 Variable 2 4208.2141 37 36 1.2898 37 .982432 903593.

98678495 2.3724 30 383012.229 379066.379262106 0.423438995 Variable 2 3148.645851891 Singapore F-Test Two-Sample for Variances Variable 1 Mean Variance Observations df F P(F<=f) one-tail F Critical one-tail t-Test: Two-Sample Assuming Equal Variances 3128.3724 30 29 1.9517 30 29 Variable 1 Mean Variance Observations Pooled Variance Hypothesized Mean Difference df t Stat P(T<=t) one-tail 3128.9517 30 .237333 386957.162 0 58 -0.237333 386957.125108941 0.478071135 2.t Critical one-tail P(T<=t) two-tail t Critical two-tail 2.020815375 0.229 379066.450434969 Variable 2 3148.

t Critical one-tail P(T<=t) two-tail t Critical two-tail 2.491587189 2.455309338 2.592 30 29 Variable 1 Mean Variance Observations Pooled Variance Hypothesized Mean Difference df t Stat P(T<=t) one-tail t Critical one-tail 7741.66328694 Taiwan F-Test Two-Sample for Variances Variable 1 Mean Variance Observations df F P(F<=f) one-tail F Critical one-tail t-Test: Two-Sample Assuming Equal Variances 7741.423438995 Variable 2 7750.717 2688199.717 2688199.590667 2577493.021180489 0.392377461 Variable 2 7750.590667 2577493.900869938 2.213 30 29 1.213 30 2632846.592 30 .402 0 58 -0.392377461 0.042950881 0.

423438995 Variable 2 1632.0965 30 30 102642.041333 1632.P(T<=t) two-tail t Critical two-tail 0.392377461 .061219352 0.0965 30 29 Variable 1 Mean Variance Observations Pooled Variance Hypothesized Mean Difference df t Stat P(T<=t) one-tail t Critical one-tail Variable 2 1629.983174377 2.039413384 0.66328694 South Korea F-Test Two-Sample for Variances Variable 1 Mean Variance Observations df F P(F<=f) one-tail F Critical one-tail t-Test: Two-Sample Assuming Equal Variances 1629.436990109 2.1825 30 29 1.041333 105691.301667 105691.301667 99594.6395 0 58 -0.484348082 2.1825 99594.

84933 10340268.18233 22966.968696164 2.66328694 Hongkong F-Test Two-Sample for Variances Variable 1 Mean Variance Observations df F P(F<=f) one-tail F Critical one-tail t-Test: Two-Sample Assuming Equal Variances 22940.423438995 Variable 2 22966.12 30 29 1.12 9848519.032507208 0.509 30 29 Variable 1 Mean Variance Observations Pooled Variance Hypothesized Mean Difference df t Stat P(T<=t) one-tail t Critical one-tail P(T<=t) two-tail Variable 2 22940.392377461 0.81 0 58 -0.487089589 2.049931221 0.84933 9848519.974179178 .509 30 30 10094393.18233 10340268.P(T<=t) two-tail t Critical two-tail 0.448258342 2.

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