From the August 01, 2011 issue of Futures Magazine • Subscribe!

Equities, squared

Modern stock analysis

Because stocks or sectors never are traded in a vacuum, it’s important to have a way of ascertaining the intermediate trend. Gann considered this subject to the Law of Vibration. He stated, "Through the Law of Vibration every stock in the market moves in its own distinctive sphere of activities, intensity, volume and direction. Stocks, like atoms, are really centers of energies; therefore, they are controlled mathematically."

If we can uncover the key vibration, or square, of a market sector, we can leverage that information to gain an edge as a trend emerges.

Such a case materialized in the housing sector in November 2009 (see "Housing bounce"). The HGX housing sector index bottomed on March 6, 2009, along with the rest of the market, at 54.31. The top of the old bull market was 293.66, for a range of 239.35 points. As in all cases, when it comes to market timing, a margin for error of plus or minus one point is acceptable. In some scenarios, two days works as well.

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In this case, on Nov. 2, 2009, the HGX completed a 22% correction in roughly six weeks. More important, the low was 241 calendar days off the bottom, missing an exact range and price square by 1.5 days. Armed with that knowledge, the trader not only can pursue opportunities in the housing sector, but elsewhere, as the S&P 500 also bottomed on that day. This turn led to an immediate 11.75% rise in the SPX to the January 2010 high. Overall, the HGX kept going until April 2010 with a gain of 46%.

Here are the adjustments that need to be made when working with stocks. The chart may not line up with the range exactly, as in the Dow/NDX example. It’s important to be cognizant of symmetries on the chart and put on a detective hat to uncover opportunities. Be aware of prior highs and lows. For instance, if a stock is trading at the $60 handle, the trend may have begun 60 days ago. With the same high at $60, the next pullback may end at $6 lower. Let’s consider an example that is fairly close to this concept.

RIMM provided several interesting examples in late 2010 (see "Price/time pullback"). The first symmetry lines up at the 55.49 handle to complete a pullback 55 trading days off the low. The price action then hits a near-term peak at 63.94 in 64 trading days. The action pulls back again for a correction of 6.46 points. The 6.46 lines up with the 64-day high. The 6.46-point low also lines up with the 200-day moving average and an Andrews median line.

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Finding symmetry of points and days is the key. This could work out in trading days or calendar days. Once the symmetry is spotted, don’t front run the calculation. A candle reversal formation either on the daily or smaller time frame will confirm the action on the chart.

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