The technical study of Elliott Wave theory and the Fibanocci sequence is vast, intensive and highly subjective. There is a technical tool or series of measure that allows this study to be applied and used in an abridged form.

The Fibanocci sequence was discovered in the 16th century by an Italian mathematician of the same name. It is derived from a series of two successive numbers added to each other, beginning from zero. The numbers are 1,1,2,3,5,8,13,21,34,55, 89 and 144. Each number added to the prior sum forms the next. These base numerals divided create the percentages of 1.00, .50, .38 and .66 - the basis of retracement sequence.

As base numbers increase it's divisor percentage narrowly fluctuates above & below .618, considered to be the mathematical "golden ratio". This quotient is found to appear in all manner of the universe including architecture, biology, engineering and science among many others.

Ralph Elliott was an individual who became fascinated with market action late in life while confined by illness to his home. During the mid-1940s Elliott published numerous works on the topic of "market wave theory". His research and observation uncovered a definite pattern of price action similar to the structure of the universe, growth of living organisms and rhythm of ocean waves.

It was his opinion that all financial markets grew over time under the same natural law everything in existence is held subject to. The resulting study has become incredibly extensive and open to great debate in the half-century after.

As traders, we can identify "lulls" in such market waves by calculating these key percentages based on the sum total of distance between the most recent market low price at close versus the nearest high closing price. Projected into the future, the levels near 38% become the first price magnet followed by 50% and 62% of the recent move up or down. This can be done manually or with drawing tool features on advanced charting services as depicted below.

In a nutshell, Elliott wave theory is based on the assumption that market action ebbs and flows in predictable patterns just like everything known to man. One can learn the study of identifying these waves of growth or rhythms of the market based on the Fibanocci scale. Without detailing this exhaustive subject at length, let's view some recent examples and learn how to apply them in our own technical study:

As the Dow Industrial Average moved from a low near the 9800 range to a subsequent high of 11,200+ we can measure by marking key Fibanocci numerators (38%, 50% and 62%) future price action of support and resistance. This can provide us great insight on entry and exit points near reversal areas in the broad market.

These price-magnet levels are also popular points for investors and traders to place protective stop and also buy-to-open stops near as well. This natural human behavior based on technical tools can further affect market action as the buy/sell orders are reached.

It appears the levels near 10,540 and 10,375 are important areas of support in the event of further market correction from here. 10,720 is holding the market's recent action over the past several sessions in this example.

A weekly chart of the INDU identifies significant levels of support in the event of a major market correction. An extreme move to the downside should find strong support near 9700 and major help at the 9200 range. A test of either together with bullish technical tools converging could be viewed as extremely strong buy opportunities.

Without question there is merit to the technical study of Fibanocci and Elliot Wave. We can choose to study these topics in depth to explore the inner workings or simply opt to utilize them together with other forecasting tools. In any case, the use of these equations can help us forecast future price and market action.