Can Returns Breed Like Rabbits? Econometric Tests for Fibonacci Retracements

Abstract

This study develops a novel and intuitive econometric test to investigate the predictive power and abnormal return-generating capacity of Fibonacci retracements. Results suggest Fibonacci retracements are prominent for international stock market indices and foreign exchange rates, with 0.0%, 38.1%, 50.0%, 61.2%, and 100.0% being the most important retracements, while the inclusion of 14.6%, 23.6%, 76.4%, 78.6%, or 85.4% levels reduces the predictive power of the model. The findings cannot be explained by calendar market anomalies or return reversals. On individual stock level, an S&P 500-based strategy that longs (shorts) stocks closer to Fibonacci retracement support (resistance) generates positive and statistically significant alpha in Fama-French multi-factor models as well as demonstrates market-timing properties.

Keywords: Fibonacci retracement, golden ratio, technical analysis, support and resistance, market efficiency

JEL Classification: C58, G12, G14