Fibonacci and Gann Applications in Financial Markets – Practical Applications of Natural and Synthetic Ratios in Technical Analysis : [PDF Download]

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“The analyst would be well advised to take extreme caution with the application of Fibonacci timelines in markets composed of players with different goals and needs. In markets where risk transfer and price discovery are primary and the instrument is not used for other needs then the tool works fairly well, as can be seen in the following examples of yield analysis.

In this example of the ten-year spread of the German bund and ten-year US Treasury Note yield timescales work fairly well up to the 34th period, as shown in Figure 7.4. Key spread move days are seen following all the initial moves and a recovery in the 21st period in May 2003.

However, benchmark spread analysis suffers from the frequent problems raised with a change of benchmark bond. This is most marked in the late July period in the chart where the Note changes but the Bund bond stays the same.

This can give rise to a false impression on a yield spread chart and at that stage the analyst would not want to be using too many tools that relied upon levels constructed from previous benchmarks.

At a rollover where there is a gap or big move I would prefer to use more traditional tools and leave any tool that relies on a relationship with previous data for construction well out of the picture, as is the case here.”

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