EC Fibonacci Levels And A Silver Lining For Stocks

The S&P 500 Index (SPX) continues to rally after the coronavirus market crash that started in March. The index, however, is running right into its 61.8% Fibonacci retracement level after being rejected there around the end of April. These levels are accessible on most charting software because they are popular support/resistance levels. Is there any quantifiable evidence that these seemingly random levels should affect a stock price? In the study below, I consider prior 20% market crashes and look for evidence that Fibonacci levels impede the recovery.

SPX Fib Levels

METHOD & BENCHMARK

For this study, I went back to 1950 and found each time the S&P 500 fell at least 20% from an all-time high. Using the all-time high and the lowest point since that time, I calculated the Fibonacci levels. Then I found the specific dates at which the S&P 500 closed to within 2% of the levels. It had to be below that level for at least 10 trading days. If those criteria were met, I looked at how the market did going forward. Here are the periods I identified where the S&P 500 fell by at least 20%.

SPX 20percent corrections

I also needed a benchmark for comparison. My first inclination was to use anytime returns on the index since 1950. That, however, does not account for the environment in which these signals are taking place. Since all the signals are occurring after a market bottom, the signals are occurring in a bullish environment. To account for the environment, I just eyeballed the chart during each pullback and found the time where I considered the recovery complete. It’s a haphazard way of doing it, but I think it made for a more apt comparison. The tables below compare the anytime returns of the S&P 500 since 1950 and the returns during these recoveries. The returns during the recoveries were significantly better than typical returns. I’ll be using those recovery returns as a benchmark.

SPX Returns Benchmark

TESTING FIBONACCI LEVELS AS RESISTANCE

Since the index is currently right at that 61.8% level, let’s look at that Fibonacci retracement first. Again, looking at 20% pullbacks, these are S&P 500 returns after the index gets to within 2% of the level, given that it has been under that level for at least ten straight trading days. I compare the returns after those signals to the recovery returns mentioned above.

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Terrence Howard 5 months ago Member's comment

History does tend to repeat itself, so the past can be a good indication of what will happen. Though I do wonder if our facing such an unprecedented situation, if things will be different this time...

Schaeffers Research 5 months ago Author's comment

Thanks, Barry! We post a new deep-dive into our indicators every Wednesday on www.schaeffersresearch.com. We appreciate your feedback!

Barry Hochhauser 5 months ago Member's comment

Good read.