By Jamal Mecklai, CEO, Mecklai Financial
In mathematics, a Fibonacci sequence is where each number is the sum of the two numbers that precede it. Starting from 0 and 1, the sequence begins 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144…
The Fibonacci numbers were first described in India as early as 200 BC in Pingala’s work on enumerating possible patterns of Sanskrit poetry formed from syllables of two lengths. They are named after the Italian mathematician Leonardo Bonacci of Pisa, also known as Fibonacci, who introduced the sequence to the western world. They appear to reflect the natural world as the numbers describe observations of the branching in trees, the arrangement of leaves on a stem, the number of seeds in succeeding rings of a sunflower, the spiral shape of waves, etc. (Wikipedia plus)
Since these are recurring patterns in nature and since markets are, in many senses, a reflection of nature, the science of technical analysis has evolved and uses uses patterns based on Fibonacci numbers to try and forecast markets. I have looked cursorily at the discipline, and am very, very, very much an amateur, but I certainly find it curious since it reflects my belief that everything everywhere is connected and, indeed, one.
With my limited knowledge, the only pattern I think I can understand is the head-and-shoulders (and its reverse), which looks exactly like the name suggests. I noticed that the movements of the rupee this year appear to be creating a series of these S-H-S patterns. (Apologies for all the numbers which must make this piece difficult to read.)
On February 10, the rupee fell to 87.90 from 86.30 (on January 24), before rebounding to 86.50 two days later (February 12), forming what is called a neck-line at 86.40 (halfway between 86.30 and 86.50). After that, it moved around between 86.50 and 87.50 for over a month, before it climbed above the neck-line on March 20. This completed a (reverse) head-and-shoulders with a target of 84.90 (neck-line at 86.40 minus 1.50 [reverse head at 87.90 minus neck-line of 86.40]), with a pattern failure if the rupee fell back below the neck-line (86.40). In fact, the rupee strengthened sharply to 84.96 (on April 4), more or less reaching the target and completing the pattern.
The rupee then fell to 86.69 (on April 10) before shooting up again to 85.14 (on April 22), setting up another neck-line at 85.09 (halfway between the previous peak 84.96 and 85.14). It then stayed below the neck-line, but in about a week it strengthened to cross the neck-line (on April 29), completing another reverse head and shoulders, this time with a target of 83.49 (neck-line 85.09-1.60 [previous bottom 86.69-85.09]). And, sure enough, in a couple of days (by May 2), the rupee shot higher to 83.80 — close to the target but no cigar.
It then fell over the next few weeks, reaching a low of 85.93 on May 23. I noticed that together with its previous low (of 85.65 on April 24), it had formed a neck-line at 85.79 (halfway between 85.65 and 85.93). The rupee bounced higher in a volatile market, and finally weakened, breaking the neck-line on June 4; together with the peak (head) of 83.80, this completed the S-H-S pattern, with a target of 87.78 (85.79+1.99 [85.79-83.80]).
On June 18, we were at 86.50, possibly on the way to the (approximately) 88 target. I note that there are several events in the near future that could create possible market trauma to drive the rupee lower — the passing of Donald Trump’s Big Beautiful Bill expected by July 4, the next tariff deadline of July 9, and, of course, the Israel-Iran war, which could result in the Strait of Hormuz being mined and closed to shipping at any time. Clearly, a weaker rupee is certainly a possibility. Having said that, the caveat is that if the rupee climbs above the neck-line — viz. 85.79 — the S-H-S target is aborted.
Clearly, technical analysis is a tool for traders and not for risk management. However, there are pointers we can get. For instance, exporters with open positions could stay unhedged today with a stop loss at 85.79, although being completely unhedged is always a bad option and particularly foolish in such a volatile market. Another important point to learn is that the market appears to always react very sharply after a target is reached — this means that when you see a huge move, you should act immediately rather than waiting for further gains.
Again, the technical signal of further rupee weakness came nearly two weeks ago, when the neck-line was broken on June 4, and the rupee was still (a bit) stronger than 86. Any unhedged short term imports — and I pray there were none — should have been hedged then.