From the May 01, 2012 issue of Futures Magazine • Subscribe!

Gann square outs: Time and price balance in the markets

Discovering detail

Markets are enigmas, and this attribute demands a great deal of flexibility when working with price and time studies. For example, a common manipulation is the decimal point — a Dow range of 7,728 points can square with a rally 77 weeks down the road. A 21-year, 1,108-point range in a market could identify a turn 1,108 weeks later — as it did with the 1987 stock market crash. However, as complex as this appears, markets can get even more complicated. But as it is with the study of pivots, the Gann calculations themselves are decidedly simple.

Take, for instance, the 2011 bear market in the BTK Biotech Index (see “Tech crunch,” below). The peak of this market was on May 13, 2011, with a price of 1514.60. The bottom came in on Nov. 25, at 1,001.33. The exact range is 513.27 points. What was the date of the high? It was May 13, or 5-13. The market had a range that was equal to the date of the origin of the pattern. This is just another example of how Gann’s principle of time and price balance out. 

What should be understood about this mystery is it does not materialize every day. However, when it does, it usually leads to a powerful trend, as it did in the case of BTK. Going back to our ’87 crash example, consider the stock index price rise that followed the bottom.

Another progression in the study of price and time work is the square root. In the case of the BTK, the first important pullback in the bull move off the Nov. 25 low came at 1,427.26. On the surface, that means absolutely nothing. However, when we take the square root of that figure, we get 37.77, which Fibonacci enthusiasts will recognize as the derivative of 377.

The simple square root, which we all learned in grade school, is an integral hinge on which the markets turn, but because it’s hidden just under the surface, it’s not immediately apparent. Consider the Dow sequence from the March 2009 bottom to the May 2011 high. The high on May 2 was 12,876, after a bottom on March 6, 2009. The 12,876 numeral doesn’t seem so important by itself until we take the square root, 113.47, and discover the market peaked in the 113th week of the rally. That May high also was the day after the United States military killed Osama Bin Laden. The media was expecting a nice rally off the news; however, that was the day markets peaked for the year. Other markets had their own calculations, but this was how the Dow contributed to the peak and led to a grinding 108-day correction, which ended in October.

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