The trading community is relentless in its pursuit to find out how and why the market turns. Bull and bear markets surge relentlessly along their path until one day they reverse course and set sail in an entirely new direction, never looking back. Markets march to their own drummer with a language all their own.
Certainly, fundamental valuations play their part in determining where we might be in the cycle. A price/earnings ratio can tell us whether the market, or particular stock, is cheap or expensive at a specific point in time, but it has zero capability of telling us when the turn will come.
To solve this riddle, many turn to technical analysis. Technical analysis is the study of price patterns and the visual representation of emotion in the market. Examples of key technical tools are moving averages, trendlines and Andrew’s pitchfork. While these are important indicators, markets can and will overshoot their technical target, and the study of patterns can give us only a rough idea of when and where a market might turn.
So if fundamental and traditional technical analysis can’t nail the turn consistently, what can?
One class of analysis methods that works over time involves the studies of W.D. Gann. These techniques have proven instrumental in pinpointing and explaining market tops and bottoms. While it’s not always clear why a time and price symmetry identified a market turn, such symmetries do indeed exist. Gann, a well-known analyst from the first half of the 20th century, considered the squaring of price and time his most important discovery. He called it range and time squared.
In short, when the duration of a move squares with the extent of a move, price trends tend to change. On that high level, it’s simple. However, the proper application can be tricky. In “W.D. Gann’s master forecasting methods,” (February 2011) we examined several aspects of Gann analysis. Here, we’ll delve deeper into time and price studies.