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

Equities, squared

Discipline is key

Because trading is psychological and all pivots are not created equal, trader discipline is critical. Conviction is the most important characteristic of a successful trader. Consider a trade the way a trial attorney views a jury. The most persuasive, consistent and self-confident argument often wins the case. Traders need to stack the evidence in their favor, but we don’t have to convince a jury. We just have to convince ourselves. The better symmetries are a great tool to do just that.

In many cases, the symmetry will line up as simply as it does in the RIMM study. Other times, it’s not so obvious. This was the case with Celgene in 2010 (see "Seeking symmetry"). In November, the stock peaked at 63.46. The downtrend started the next day on Nov. 3. After the first leg down, a countertrend rally peaked at 60.90 on Jan. 3, that was roughly 61 calendar days off the start of the downtrend near the close on Nov. 2. (Always look at the topping and bottoming candle to approximate where the trend begins.)

image

Once the symmetry at the 61 handle lined up, prices in the stock collapsed. It’s not easy to catch such a free fall. However, from the real Nov. 3 start of the trend, prices bottomed at the 64th trading day, and price promptly turned up near the open the next day. This case study highlights that symmetry can be more complex. Traders are limited only by our creativity.

Commodity connection

In addition to observing whether a high squares to the beginning of the trend, you also need to be aware of the low price. Also, recognize that these methods are not limited to equities. Gann vibrations are felt across sectors and markets.

One of the most complex charts to understand is the heating oil market (see "Cold case"). In 2010, Gann analysis cracked the code on the weekly rollover chart. There was a huge pullback in May with a high of $2.3574 per gallon and low of $1.8368 for a range of 52.06¢. As the rally developed, there was a good pullback at 52 trading days and a huge rally began after another pullback materialized at 182/183 calendar days off the May bottom because that was the origin price of the move. As it turned out, lesser pullbacks materialized at 183 trading days off the low and 235 calendar days off the original high.

image

The value of cracking the code on the heating oil chart is not limited to a heating oil trade. This confirmation provides insight into other commodity charts that may move in sympathy.

<< Page 3 of 4 >>
Comments
comments powered by Disqus