There are a lot of crazy theories about movements of the stock market. Take a look at Elliott Waves for instance. Supporters believe the tenets of Elliott Wave Analysis like a religion, while those who disagree believe the theory is bunk.
Have you ever heard of the golden ratio? It is related to the Fibonacci sequence that fascinates third-grade algebra students and college professors alike.
They say the golden ratio, which appears in nature too often to be coincidental, is why humans find certain rectangles appealing. Take, for instance, a widescreen television. The ratio of its length to its width is very close to the golden ratio.
The golden ratio is fascinating. Due to its appearance in nature, ancient architects used the ratio in different ways in structures like the Parthenon and Egyptian pyramids. The number is used in the construction of violins and the composition of Beethoven’s Fifth Symphony.
So just like any other mathematical curiosity, there are people who attempt to apply its theories to the stock market. I had never even thought about this until I saw this article on Marketwatch.
Apparently the golden ratio plays a part in some people’s predictions of the market.
Fibonacci followers believe that unless a rebound (or a pullback) can surpass 61.8% of the original move, a ratio based on the writings a 13th-century mathematician, the original trend remains in control.
Here’s another article from Marketwatch, published in March, 2004 and requiring free registration to read, that describes Fibonacci’s relationship to the stock market in more detail. The article claims, based on the data at the time, that if the golden ratio rules come into play, then the relatively immediate future of the Nasdaq isn’t bright. (The article then goes on to talk about Elliott Waves.)
More than a year after that article was published, the mathemeticians now believe that the golden ratio was surpassed by both the yield on the 10-year Treasury note and the S&P 500 Index, which supposedly means we’re in for better times.
Updated February 6, 2012 and originally published August 1, 2005.