In December 1909, an article written by the late R.D. Wyckoff appeared in Ticker Magazine, which became known as the magazine of Wall Street. The article described W.D. Gann as "An operator whose science and ability place him in the front rank, his remarkable predictions and trading record." This article was written before 1912. That was when, according to Gann’s own marketing brochures in the 1930s, he successfully publicly predicted the election of Woodrow Wilson and each U.S. president up to that time. He specifically called for the end of the1920s bull market in a September 1929 panic; he recorded this prediction in November 1928.
To accomplish this and other successes in a 50-year track record, Gann used a mixture of geometry, psychology, volume patterns and astrology. He developed specific grids and circles based on cycles of numbers such as 9, 12, 144 and others to forecast everything from stock to cotton prices. He developed a calendar that uses March 21 as the most important date in the financial year. Through everything, he considered his most useful and valuable discovery to be the squaring of price range and time.
But Gann analysis is as mysterious as it is effective. One of the reasons is Gann didn’t want to just hand over the keys to the novice or intermediate trader. He guided his students, but insisted they do their own due diligence. He was a firm believer that students would better appreciate and understand what was learned if they did it on their own. Consequently, many of his methods and theories have been overlooked for nearly 100 years.
In the February 2011 issue of Futures, "Master forecasting methods of W.D. Gann" described how Gann uncovered trends of larger degree. For instance, the Dow 1987 crash range was 1,108 points, and a span of 1,108 weeks bridged the time gap from the August 1987 top to the first Nasdaq bottom in the bear market.
The 21st century Gann analyst often must combine one or more indexes simply because markets are more complex than in Gann’s day, but the concept is the same. Range and time squaring can help the trader understand the overall long-term conditions of the market. But modern Gann analysis also requires an adjustment when it comes to trading individual instruments.
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.
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.
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.
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.)
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.
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.
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.
Word of warning
A couple of caveats are necessary. Because all pivots are not created equal, symmetries do not appear each time a particular pullback materializes. So, when one does appear, the conviction to take the trade and stay with it is warranted. If a watch list is kept, you’ll find that symmetries show up somewhere on that list. You don’t need more than a couple in a month to do well.
The next point to consider is to use another method in concert with the symmetry finding. Make sure the market confirms what you see. One good method to pair this technique with is candle reversal formation analysis. If the reversal formation doesn’t appear on the daily time frame, it may appear on the hourly one. In that case, manage the trade in the time frame where the candle formation materialized.
There are various psychological pitfalls the intermediate-level trader must overcome, as well. Most important, you must trust and act in a timely manner. Traders put trust in several tools and indicators that are included in most commercial software packages. On the surface, it might appear that a 6.46 pullback after a $64 high may be too simple to believe. Do the due diligence, find a handful of these kinds of setups and watch what happens. It took Gann many years of patient study to prove to himself and others that these simple methods explain what he termed "every possible phase and condition of the market."
Jeff Greenblatt is the author of "Breakthrough Strategies for Predicting Any Market," editor of the Fibonacci Forecaster, director of Lucas Wave International LLC and a private trader.