As hard as this analytical sleuthing appears, the rewards are worth the effort. All the trader needs is to find one key calculation on an important chart and leverage it out to the overall market. If BKX or BTK has a great reading, the entire market usually will respond. The square-root method is the next progression of analysis when simple price and time methods don’t uncover the symmetry.
Patterns can be found in stocks, as well. One of the better examples is the first rally leg in the new bull market for Alcoa (see “Metal mover,” below). Alcoa bottomed on March 6, 2009 at $4.97 and peaked on Jan. 11, 2010 at $17.60, 311 calendar days after the bottom. The square root of 311 gives us 17.63, only 3¢ off. It sold off for the next seven months. In the world of Gann, exact precision materializes many times, but close is good enough.
There are no coincidences. Gann and several generations of traders have used time and price analysis combined with square roots successfully. Some consider Gann to be the Holy Grail of trading. It’s not. What must be understood is that until there is a pivot — price action — there is nothing. You can spend a lot of time figuring out where a market is going to turn based on certain symmetries. It’s best to have a rough idea without spending too much time looking for a move that is not there.
For instance, because the SPX bottomed at 666, it doesn’t take much effort to look at 66 days or weeks, nor does it require much effort to figure out the square root is 25.8. In that way, the trader can be loosely aware that at 26 weeks, or 258 days, a turn might occur. But if not, there’s no harm — trades should not be placed in anticipation of Gann moves prior to price confirmation. On the other hand, this methodology becomes valuable when an important price pivot has materialized.
Also, this isn’t a trading method where you look for entries simply because a square root lines up. There is a macro and micro picture. One of the biggest stories in financial markets in 2011 was the expectation of so many equity euro bears that Greece would lead to the next Lehman moment. It never happened because too many traders allowed themselves to be ruled by their emotions and did not really understand the importance of cycles.
Before attempting trade entry, you need an edge that gives you confidence that you are on the right side of the market. Once that is established, you can use your own rules and discipline to find good entries. Gann will help and square roots certainly are an important piece of the puzzle.
Finally, consider the bear market low for the SPX at 666.79. It has an exact square root of 25.82. Go back 258.3 months, and we have the August 1987 peak before the crash on Aug. 25. This may finally explain the March 2009 bottom because the 1,108-point Dow range produced the NDX bottom on Nov. 21, 2008.
Take the same Dow bottom at 6469, and we get a square root of 80.43. The retest of the Great Depression low is recognized by market historians as the second most important low of the 20th century on April 28, 1942. That pivot is 802.3 months removed from the 2009 bottom, which is close enough to consider.
There is a checklist of conditions for discovering time and price squares:
- Check the trading or calendar day count.
- Look at the high, low and range to see if there is any symmetry. If something materializes, that will be good enough.
- Keep an eye out for the requisite price pivots. If no signals emerge, take it one level deeper and work with the square roots.
- Once the reversal materializes, you leverage in the trading instrument that flows with your data.
As you perform your due diligence, you might find something else, such as a specific date matching up with the range. Opportunities are out there. There might be something vitally important sitting just below the surface of your price charts. Gann time and price analysis and square roots can get you there.
Jeff Greenblatt is the author of “Breakthrough Strategies For Predicting Any Market,” editor of the “Fibonacci Forecaster,” director of Lucas Wave International LLC and has been a private trader for the past eight years.