Fibonacci’s Golden Ratio Reveals Crude Oil Market Trends

Last week, our friend Steve Belmont made an interesting comment. “Since markets are human creations, they respond to human rhythms. Like all human emotions, fear and greed tend to reach a fever pitch and then, invariably, wane. One could say market corrections are basically physical manifestations of waning human emotions. Italian mathematician Leonardo Fibonacci figured out a way to measure the ebbs and flows in human emotions. This measurement is called a Fibonacci sequence or the “golden ratio.”

Steve, who trades commodities for a living, applied the golden ratio to the recent action in the oil markets. “Fibonacci discovered that corrections in trending markets tend to retrace 38.2%, 50% or 61.8% depending upon the strength of the trend. Markets with strong trends will retrace just 38% while markets with relatively weaker trends will retrace 50% or 61.8%. A retracement beyond 61.8% means that the trend has most likely ended and the market is entering a sideways mode.”

And here’s the bit about oil, written on Friday mind you. “This morning’s low in crude not only comes awfully close to a 38.2% retracement, it also corresponds with the 10-month uptrend line…Stocks may be melting down due to subprime woes, but that is not going to stop Americans from hopping into their SUVs nor stop violence in the Mideast. Consequently, we view this stock market-inspired correction in crude to be a near-term buying opportunity.”

Is he right? Hedge funds haven’t only been selling blue chips to raise cash recently. A lot of long commodities and resource bets in the futures markets are being closed, too. The reduction in financial speculation on rising commodity prices accounts for some of the price action in the futures markets. But in the real economy, as Steve points out, the real demand for oil is a lot more robust than the financial demand for oil.

Dan Denning
Markets and Money

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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3 Comments on "Fibonacci’s Golden Ratio Reveals Crude Oil Market Trends"

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While I greatly enjoy your writing, I must take exception with your meaningless attempt to correlate human behavior with Fibonaci Sequences.

I am always amused by writers that allude to the seemingly magical properties of Fibonaci sequences – as if there is somehow a mystic insight engendered by the output…


Fibonaci sequences are RELATED to the “golden ratio” – but is NOT KNOWN as the “golden ratio”.

Linder R. Parker

Subject: Fibonacci

Please tell me, do all trending pairs respond well to Fibonacci.

It seems to me I get better results with US pairs. What about GBP pairs and JPY pairs?

To comment on TheShadow’s remark, “Fibonaci sequences are RELATED to the “golden ratio” – but is NOT KNOWN as the “golden ratio”.” There is more than just a ‘relation’ between the two. That’s like saying that the limit as x approaches infinity of 1/x is only ‘related’ to zero. The are not the exact same thing, but they have more in common than just DNA. “as if there is somehow a mystic insight engendered by the output…” As a mathematician, I must admit that my appreciation for phenomenon such as this is a little bit over-the-top. However, there DEFINITELY is… Read more »
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