Again, buy the rumour sell the fact

November 6th, 2008  by Lou Muddaris

Closing Data

	current	change	%
Dow Jones	9139.27	-486.01	-5.0%
NASDAQ	1681.64	-98.48	-5.5%
S P 500	952.77	-52.98	-5.3%
FTSE 100	4530.73	-108.77	-2.3%
Nikkei 225	9521.24	406.64	4.5%
SPI Futures	4199	-166	-3.8%
All Ords	4287.3	117.5	2.8%
Oil	65.44	-5	-7.1%
Gold	742.4	-14.9	-2.0%
Silver	10.455	0.325	3.2%
Aluminium	1990.5	24.5	1.2%
Copper	4231	271	6.8%
Lead	1521	66	4.5%
Nickel	11810	455	4.0%
Tin	15250	1250	8.9%
Zinc	1135.5	35	3.2%

The U.S. market and the All Ords yesterday screamed higher on the anticipation of a Democratic victory and overnight fell on simply profit taking, if you can make a 20% profit in what normally takes 2 years in just 1 week then it's a no brainer! Congratulations to Lawrence Grasso who in his maiden Fox Report of yesterday headlined "The day to take profits"…I'm just amazed he didn't back Viewed.

The Obama Factor

Apart from the unparralled popularity and his rallying cry of "I'm going to change the world" (good to see a U.S. president can see futher than the East Coast) the markets did react positively as he intends to issue a 2nd stimulus package of $200 billion aimed at the housing market and infrastructure. It is worth noting that from Roosevelt to Clinton, the U.S. stock market has rallied on average 9% the year the Democrats were elected…all except Jimmy Carter who suffered under the Oil crisis.

Our Market

Yesterday we advised to at least sell covered calls although unfortunately the premiums weren't that inspiring due to a "perception" from the market makers that we were due for a correction (nothing goes up in a straight line). Also not helping are ANZ, Westpac and NAB going ex-dividend. We still maintain that advice, that any major bounce must be "written" into.

Yesterday, Westpac and CBA badly underperformed on the news that Allco are going under. Westpac finally admitted they are facing losses there of at least $200 million and CBA are playing dumb but the market is talking of $300 million write downs (and analysts thought NAB and ANZ were the bête noirs).

Today expect heavy profit taking with many buyers sidelined as we await Friday's "Mother of all Figures", the U.S. non- farm payrolls.

To quote Monty Python, "and now for something completely different"

Leaonardo Fibonacci (1180-1250)

This mathematician/farmer is the most respected and widely used technician when trading today's markets. His work is extremely complicated and can be easily misinterpretated so I'll try and keep this simple!

He initially formulated his numbers theory based on how his rabbits bred! He observed that after a few months the number of offspring followed a definite pattern of 1, 2, 3, 5, 8, 13, 21 with no offspring amounting to 4, 6, 7 etc. He then formulated that the pattern was to add the 1st number to the 2nd then add the next one etc, so1+2=3, 2+3=5, 3+5=8, etc, etc. From this he developed the "Golden Ratio" or phi which was derived by dividing the successive numbers and the fraction equaled 1.618 and its inverse 1: .618. This ratio became more accurate the further you go out in the numbers.

So What?

It has only been in the past 40 years has his work been applied and acknowledged as "The building blocks of life". These Fibonacci numbers can be seen everywhere in life and nature. The list is endless, but I'll cite a few major illustrations.

All plants grow leaves in Fib' numbers. They start as one, then 2 then 3 then 5 then 8, etc and the same applies to their shoots (hence the rarity of 4 leaf clover), even a trees branches. Even looking at the petals/spirals the same numbers reoccur. Curvature of shells and animal horns are all Fib' angles.

The angles of the greatest historical constructions in the world are Fib' numbers. The Pyramids are a classic case in point: a few of the key numbers used in trading the markets is 32.8 and 61.8 and .618. (The golden ratios) can also be applied. The angle of the pyramids are 32.8 and if you drew a longitude line to cut the North Pole then it hits at…32.8! If you measured the Pyramids perpendicular line then it measures .618.  The Parthenon has identical numbers. Your credit card has the same dimensions…0.618. The ratios of Mona Lisa facial features are all Fib numbers. The Human body proportions are all Fib' numbers. The list is unbelievably endless…certainly worth googling!

Fibonacci Numbers and the Markets

Almost every single technical trader/chartist uses his numbers when trading, indeed Gann and Elliot Wave are largely based on it. They can be used to measure extensions, retracements and change in market directions. For example, in the stock market crash of 9/11 we fell from the highs and rallied after a 32.8 retracement. The 1987 crash stopped and rallied big time after it had broken above .618, hitting the 6,730 high. To be more update and relevant the TIME from the ASX high in December 93 high and the February 03 low shows a major turning point was due in October 2008.

He certainly has a cult following and indeed he's almost in the same league as Ian Botham!

Have a great day.

Quote of the day: Simple minds discuss people. Clever minds discuss events. Great minds discuss Ideas.

Contact your Freeman Fox Stockbroker on 07 3031 9960 or 1800 003 369 Ext 7.

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