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strong swings。within the larger trend。 These internal milestones。are markers； revealing the price levels。the market is。using to build future price swings。 There are discernable mathematical relationships。between one key market pivot and another that tie the pivots。together within all time horizons。
The important price levels。can be identified by starting at the 〃top〃 and then examining each pivot price low as。a possible new range。 In Figure 5。1； bold lines。clarify the start； end； and resulting subdivisions。within the range。 The 01。8 ratio bisects 50。 It is highlighted with an arrow。 With just one Fibonacci grid in place； it's。impossible to know whether the levels。within the subdivided range are major or minor support。
Starting from the same high； a second low is。selected； just under 30。 The resulting subdivided range produces。a 50 percent retracement near 50； which overlaps。the 01。8 percent retracement from subdividing the first range。 These different Fibonacci ratios。that overlap form a （（influence target； which is。major support。
If this chart were inverted to represent a market in a downtrend； producing a sharp upward retracement； the calculations。for resistance would always。be started at the bottom； and then price highs。would be selected。 Starling retracements in this。manner allows。the internal swings。to be examined。 If you start in reverse； you are always。forced to go straight to the market extreme top or major bottom； and the internal dynamics。of the data would never be considered。
Price Projection Using Geometric Proportion
The monthly chart for crude oil futures。in Figure 5。2 includes。a third range to the price low； at the bottom of wave 2。 The confluence zones。that form define major support for this current decline at 56； 50； and 44。 However； an important change was made in Figure
5。2。 All the Fibonacci ranges。start from a price high that truncates the spikes。into the double top。 That's done to clearly illustrate that the same starting point is。always。used for each range selected； but the price high itself is。not always the best place to start。 Sometimes it makes。sense to truncate spikes。when the majority of closing periods。fail to record a close within the range of the spike。 To simplify the chart； add a horizontal line at the continence zones。to mark。major support targets。 The targets。in Figure 5。2 are near 56； 50； and 44。 In practice； it is。important to be aware of the width of the confluence zone and not just a single value within the target range。
A 14…period relative strength index （RSI） indicator。was。added to the bottom of Figure
5。2。 An oscillator can confirm the key pivots。 In this。chart the 14…period RSI has。two moving averages。 The averages。are calculated from the RSI； not from price。 Moving averages。serve as。support and resistance levels。for the indicator。 Points。P and Q mark。two momentum extreme lows。 Notice the character of these momentum lows。 Both form a W pattern before the market successfully。engages。in a strong advance。 Past character is。nearly always repeated in the time frame being studied。 So we know two things。from reading points P and
Q： First； this。market likes。to produce a plex W； so we need not take the reversal seriously until it does。 Second； the market does。not have such a pattern in place now。 It can further be said this。market may be oversold； but it has。not defined a final bottom。 Because the market is。at 56； the confluence zone under the market bees。the more likely target at 50。 An extension would allow a move to 44； but just under this。zone bees。the precise area at which the market should not trade if the opinion is correct that this。market will make a full retracement back。to the highs。 Knowing where the market should not go gives。us。a clearly defined risk…reward ratio。 It also clearly defines。a level at which the implications。for global rates。and equitiesuld change。 For this reason； the decline is。setting up the long…term picture in financial markets。
The confluence zone defining a price target at 50 is。of particular interest。 If you find the Elliott Wave Principle a challenge； this。approach will be invaluable to you。 Notice the swing low marked C； or the bottom of wave C of （2）。 A box is。now drawn from this。pivot low up to the confluence zone near 50。
In Figure 5。3； the box is。moved without changing its。height to project an equality move up from 50。 The box defines。a future market swing projection based on geometric proportion。 There are other geometric。proportions。that require close study。 As。an example； the 50 level also marks。the halfway or midpoint between a range from the high； marked iii； and the low； marked wave 2。 This。independent observation about a geometric。proportion does。not depend on a wave count； but it helps。us。train the eye to look。for balance and proportion within the chart。 The box high produces。a price target near 97。 Such a move would have seriousnsequences。for the strong rallies。developing since the 2002 or 2003 price lows。in global equities。
In Figure 5。3。 the RSI has。two formations。marked at points。R and S。 Point R is。subtle。 It is。the RSI 〃kiss〃 just under the crossover point where the short average crosses down through the longer…period average of RSI。 This。exact junction should always be monitored because markets。often produce strong moves。from this。internal momentum signal。 At point S； the market forms。a choppy top but breaks。down because the RSI fails。under the averages。again。 Do not look。for divergences。alone in RSI； because there is a wealth of information in the details。
Using RSI to Define Trend
In all time horizons； study the range traveled in the RSI。 Notice in Figures。5。2 and 5。3 the RSI momentum highs。challenge the 80 level。 In November of 2006； the current market data was。moving RSI toward 10。 Bull markets。track。well above the RSI 65 level； whereas。bear market rallies。will top within the 60 to 65 range for RSI。 Corrections。in bull markets。often stay above 40； but the declines。in bear markets。will break。down below the 40 level。 These range guidelines。apply to all time horizons。within a 14…period RSI。
It is。critical for the analyst to let the market show where these levels。of respect form。