Inside Investment: Voodoo analysis
The wilder shores of technical analysis never want for proponents and followers. So are there perhaps truths to be found in all this numerology? Or is it just a load of bloody offal?
At the start of Dan Brown’s The Da Vinci Code, a museum curator, Jacques Saunire, lies dead in the Louvre, Paris. His corpse is spread-eagled like Leonardo DaVinci’s Vitruvian Man and in Saunire’s own blood there is scrawled a pentacle and a Fibonacci sequence. It turns out the Fibonacci sequence, a series of numbers formed by adding the sum of the previous two numbers (1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, etc) is key to finding the hidden meaning in DaVinci’s paintings and cracking the code.
Brown is by no means the first person to instill the Fibonacci sequence with quasi-mystical significance. A number divided by its predecessor in the sequence always approximates to 1.618, or phi. The golden ratio, as it is known, recurs in nature, in architecture and, of course, in art. In finance, Fibonacci numbers and the waves they create are at the heart of many technical analysis systems.
Among the lunatic fringe of technical analysis, advances and falls of 61.8% from previous highs and lows in markets – from soy beans to currencies – mark turning points.