Wednesday, May 20, 2009

padovan ratios+Forex market prediction -- search of the day (or a look at EUR/USD from a proportional perspective)

last night someone from an undisclosed location arrived at Trend & Value from the following search:

padovan ratios+Forex market prediction

now I can honestly say that the only relevant results on that search were for things that I have written. so either I am ahead of the times for incorporating the Padovan Sequence and its limiting ratios into the price analysis of financial markets or I am just a crazy chasing butterflies or windmills or cliches.

in any case, I am going to take this opportunity to analyze the EUR/USD currency pair from a proportional perspective.

in Architectural Theory, there are two major, competing Proportional Systems. one is based on the Fibonacci Sequence and its limiting ratio of 1.618 (aka Phi, aka the Golden Number). the other, less well Known system, is the one based on the Padovan Sequence and its limiting ratio of 1.3247 (aka P, aka the Plastic Number).

in the world of price analysis, Phi and its derivatives have been used to generate price targets, resistances and whatnot for decades. what started as a well guarded secret shared by a handful of traders has attained the level of a ubiquitous public usage. 'Fibonacci Trading' is hyped on innumerable websites, in books, and every charting service features Fib retracement tools, 'fans' and such. this is all well and good, in fact up until recently I myself was a big Fibonacci enthusiast.

but then last year I happened upon the Padovan Sequence. initially I started to apply the ratios derived from the Sequence as simple support and resistance levels, in much the same way that everyone is using the Fib ratios now. but as my thinking progressed it came to me that an integrated 'System of Proportion' based on the Plastic Number could be devised and applied to the analysis of securities transactions. and not just for simple price analysis, but for the proportional relationship between the dimensions of Price, Volume, and Time.

then just recently I have come to the understanding that by using solely the Plastic System to the exclusion of the Golden System (or vis-a-versa for that matter) I was erecting a needless schism. in reality, the interaction of the two systems offers the most fertile grounds for investigation.

before I continue I should clarify that Proportional Analysis is first and foremost a descriptive endeavor. the primary task is to assess what has happened so far. only after we have described the historical development of a market in terms of proportion can we attempt to extrapolate the underlying 'proportional sequence' into the future.

now obviously this projection of the past into the future is prone to failure. this is true whether one is using Proportional Analysis or some other means of guessing. I happen to think that my application of the principles of proportion to market analysis, while still in the early experimental stage of development, is a very promising framework from which to make projections of the future. but for all its elegance and intellectual trappings, it is just a tool to help us guess.

with that said, let's have a look at EUR/USD. perhaps the recent 'architecture' of the exchange rate can help us make a guess about what is around the corner.

here is a chart of EUR/USD over the past year:

the solid yellowish lines are the retracement targets based on the Padovan ratios (hence forth called 'Plastic' targets):


the dashed blue lines are the .618 and .382 Fibonacci retracements (at 1.4623 and 1.3747), while the thick white line is the 50% level (1.4185).

you can see that when the rate got jacked up in December the rate actually exceeded both the .57 and the .618 targets. but that last push above the target happened briefly in the 'overnight' session. it might be worth noting that in US trading a high was recorded at 1.4504 (see this chart) right in between the .57 and .618 lines.

then into the first part of this year the rate drifted back down for nearly a full retracement of the previous advance.

backing up for a moment I want to point out that the initial decline last year from July into September came in at .2157. the September bounce was .0983, while the final decline last fall was .2536. the total decline last year was .3710.

the rally into December extended .2390, and from December to March the decline was .2264.

those are the ranges of the five identifiable 'waves' into March of this year. now let's measure the three waves we have seen thus far since the March low. after we have those figures we can compare them to the previous five waves.

the March rally measured .1283, the correction into April .0853, while the latest advance has covered .0945.

the March rally was 59.48% (~3/5) of wave one (w1), 130.52% (~13/10) of w2, 50.59% (1/2) of w3, 53.68% (7/13) of w4, and 56.67% (right between 4/7 and 9/16) that of w5.

the correction into April was 39.55% (2/5) w1, 86.78% (13/15) w2, 33.64% (1/3) w3, 35.69% (5/14) w4, 37.68% (3/8) w5, and 66.49% (2/3) of the March rally which we can label 'wA'.

now I Know this is getting tedious, and if your eyes are glazing over, I don't blame you, mine are too... we are almost ready to put this compilation of data to use. but first let's complete this exercise by comparing the extent to date of the latest advance to all the other discernible phases that preceded it.

as mentioned, the recent rally from 1.2886 to the higher earlier today at 1.3831 comes in at .0945 points. so the rally has been 43.81% (7/16) w1, 96.13% (1/1 essentially) w2, 37.26% (3/8) w3, 39.54% (2/5) w4, 41.74% (5/12) w5, 73.66% (about 11/15) wA, and 110.8% (10/9) of wB.

now at this point you are either bored to death and have probably long since stopped reading, or you are actually interested in how I am going to use all these fractions and stuff to arrive at a forecast for the euro. therefore I am going to cut this post short and continue the investigation as a feature of tomorrow morning's Trend & Value Letter.

I didn't intend for this post to be a 'teaser' for the subscription service, but so it goes. if the forecast I make is accurate, that alone should be worth the cost of the One Month trial price of $28 (subscribe with the payment button at the top of the blog). and if the forecast turns out to be in error at least you'll have the opportunity to evaluate the method I am using and make your own improvements. I look forward to the day when others come along to perfect the application of the method., sign up for the newsletter already. I gotta get to work.