the hAnDbook oF teChnICAl AnAlysIs
Finally, Fibonacci number counts, wave counts, time zone, and time ratio projec-
tions are purely time‐based indicators with no element of price associated with them.
That is why these time‐based indicators cannot predict whether a reversal will result
in a top or bottom formation. These indicators can only indicate when a reversal is
likely to occur. Time‐based indicators are completely unaffected by the type of chart
scaling used, as scaling only affects the price axis. Unfortunately, these indicators are
greatly affected by data adjustments on the charts for non‐trading days, much more
so than dynamic overlay indicators, as time‐based indicators reside strictly in the time
domain and are therefore more susceptible to changes along the time axis.
10.11 Area of Application
It is very important to know where and when Fibonacci levels are applicable. Gener-
ally speaking, all levels of retracement, extension, expansion, and projection are valid
levels of observation once they are beyond the last data point used to perform the
Fibonacci operation. For example, in Figure 10.40, the area of application, that is, the
area where the Fibonacci retracement levels are applicable, lies after point B, the top
of the observed retracement price range, AB. Fibonacci retracement levels cannot be
analyzed retrospectively, that is, prior to their creation, which only occurred at point
B. Any price action that seems to react to Fibonacci levels retrospectively, that is,
points 1, 2, and 3, which on the chart occur prior to the area of application, may actu-
ally serve to corroborate potential supports and resistances. This actually occurred at
point X, where the 38.2 percent retracement level coincided with a prior support level
(point 3) on IWM. What seems in retrospect to be mere coincidence may in fact help
provide additional evidence of potential support in a downside retracement.
10.11.1 area of application for Other Fibonacci applications
The proper areas of application for various other Fibonacci applications is illustrated
in the following figures. For each application, the area of application is to the right of
the vertical dashed line, as indicated by the arrow. See Figures 10.41 to 10.44.
Figure 10.39 Arithmetically Scaled Fibonacci Fan Lines.
