QUICK LOOK REPORT #34: The Fibonacci Cycles
NYSE Gann Frequencies
by Dr. Stephen Rinehart
November 5, 2006

Background:

This study considers the primary cycles in the daily closing prices of the daily NYSe Index from 1966 through Nov 2006 (Reference earlier NYSe predictions on Magnificent Seven Series on www.financialsense.com under FSU Archives as well as previous Qwik Look Reports on NYSe - Rinehart) to be the Fibonacci cycles: 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, 1597, 2584, 4181 and 6000 for the given daily dataset (add the previous two cycles together to get a longer cycle).

As we have noted in the past, the amplitude of the long-term cycles in the major market Indices correlated very strongly with similar cycles in M3 and Bond Markets (for decades) and therefore it was in the interest of the Federal Banks to stop publishing data on M3. However, it has been estimated from other Government data that M3 is in excess of 10%+ (no accounting for war expenditures). It should be noted from our prior years of Neural Net studies that this level of M3 is sufficient to generate a sharp (but shorter term – matter of months unless the M3 level exceeds 15%) rally by overriding all but the long term cycle amplitudes.

In other words, the cycles we predicted earlier remain intact but the slope of the trend line (NYSe channel) was significantly altered upwards (in mid-June 2006) by the Central Banks pumping M3 (gone on for decades but the game is approaching new and possibly dangerous levels) thereby significantly changing the slope (trend) of the major markets worldwide (this event occurred in the latter half of 2006) and we did not yet get the top of the NYSe Composite Index. In a study in Jan 2006 of the NYSe Composite Index, we noted a major (geo-political) event possibility in mid-June (June 09, 2009) and it turned out this was close to the major market bottom for the year (June 13) and the major market indices took-off in an impressive (almost non-stop economic event) rally – not what we expected. We predicted the sharp downside NYSe move (into bottom in June 2006) but not the fast recovery since the “rally after June 2006” had anything to do with cycles.

Chart 1 shows the Fibonacci (“Gann-type”) cycles in the NYSe projected forward for the remainder of 2006. It suggests the NYSe Composite Index is still trying to make high (final top) going into Jan 2007. It suggests this is the top for the NYSe Composite Index based on the current levels of M3 unless the Central Bank boasts M3 levels above 13% next month (or they are already are there with Iraqi war costs). All of this remains experimental in nature and the graph was developed on Nov 17 and we show some actual versus predicted values. The three-day cycle is not well-predicted but is of no long term consequence.

Chart 2 shows the predicted Fibonacci cycles in the NYSe Composite Index for 2007. We are heading into a bottom in August 2007 which could be followed by a rally into the 2008 Olympics as we “showcase” China. These predictions are very similar to earlier predictions which do suggest the major cycles in the NYSe Composite Index are related by Fibonacci relationships and are in fact Fibonacci cycles for all practical purposes with increasing amplitudes (but phases may not be related by Fibonacci relationships – needs to be looked at further).

Chart 3 shows the 1587-day cycle form June 2006 predicted thru 2011. The good news is that it will bottom again in March 2011 (heading for our Mega Rally) and the bad news is it is forming its top in 2007 and heading downward.

Remarks:

1. We remain in a “Catch 22 Situation” with M3 pumping of the markets by the Central Bank. The more M3 pumping that occurs, the more M3 pumping that has to be done to override the amplitude of the next larger cycle – we are rapidly approaching the time for a gut check for these people. Since the Federal Banks have turned down Case Number 21 in June 2006 (containing the 987 day cycle) and by continuing to pump M3, the remaining case left to be opened is now case Number 22 (containing four-year (1587 Fibo) - and what you may not know is this Case Number 22 also contains the huge six-year cycle (2584 Fibo) – surprise!). If you open this case now (by slowing M3), you are opening Pandora’s Box – so good luck Bankers. If you try to open Case Number 22 much later, a Dragon may pop out but open it you shall or the Dragon will do it for you.

2. The Central Bank probably does not get to play the M3 game longer than about 3.2 years which is one-half of the 6.3 year cycle (the tops of the 6.3 year cycle and 4 year cycle are roughly now coinciding which is why many are puzzled about what happened to the top of the four year cycle – it is being masked by the larger top of the 6 year cycle right now) because the amplitudes of the long term cycles also grow significantly with M3 (liquidity goes somewhere!?) and you reach a saturation point. The Central Bank cannot print enough USD to any longer override the major long term cycle amplitude or support Yen Carry Trade and you get devaluation in USD and major market correction. Normally, a major liquidity extraction is needed in the markets (also currency moves

3. Gann probably discovered the Fibonacci relationships (cycles) in commodities trading and developed a “wheel” to mechanically look at the repeating time/price patterns. That WD Gann was able to discern these complex patterns without computers must have been a rare gift of insight (like a Chess Master sees the patterns over the board without looking at it) and Gann may well have uncovered the inside commodity trading games (of his day) without the key inside traders knowing it until much later. Commodities would lend themselves to weather cycles and insider knowledge of supply disruptions or excess supply.

4. The predicted downward NYSe trend has been pushed-out into FY2007 as we try a counter the recession worldwide (it appears we may not be able to print our way out due to our housing market collapsing) but a rally into the 2008 Olympics and “showcase” China is still possible.

5. Meet me at the end of the Stagecoach Line in 2018 in a small town called Purgatory and bring your gold (and silver!) with you. There going to be some easy pickins’ over them Corporate Wall Street bones in the next fifteen years.

6. If this were “Texas Hold ‘Em”, my two ideal hole cards would be to get out of USD and prepare to stay out of the NYSE for part of 2007 (sounds like a broken record) and continue to play the turn cards of gold and silver – fun has just started. Energy anyone?

7. The eighteen-week cycle together with 36-week cycle often shapes the incoming wave fronts and a key date to watch is around Jan 07, 2007.

Hypotheses: Seven major cycles in virtually all the worlds’ indices/commodities determine our oil and gas lives far into the past (and have for many decades). What you gonna do when the Fed Printing Press comes after you because they already are coming?

© 2006 Dr. Stephen Rinehart
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Dr. Stephen Rinehart
Lynn Haven, FL USA
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DISCLAIMER: The author is not a registered stockbroker nor a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity, index or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, the author recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.