What Gann's Square-of-9 means for the Nasdaq 100

Does this portend a change of direction for the Nasdaq?

The complementary relationship between Ralph Nelson Elliott’s Wave Principle and the Gann Square-of-9 proposes an imminent trend reversal of the Nasdaq 100 Index. Though two different predictive tools, natural laws link them to the spiral of the Milky Way. 

What Elliott wave shows

Elliott’s Wave Principle comprises of a repetitive eight-wave pattern that dominates the phases of bull and bear markets. It focuses on the mass psychology of participants as they swing from pessimism to optimism and back. Five waves of advance dominate the market’s buoyancy stages, whereas the shorter despondency phase is governed by the three remaining swings (Figure 1, below). This ever changing investor psychology is reflected in the financial markets’ daily records in the form of price movements, volumes of trades and investor sentiment indices. Upon establishing the location of a stock, or Index, within the Elliott cycle, the pattern tracks its transition from evolution to progression to decay. “Man is subject to the laws of physics and chemistry that govern biological processes on earth, and that these laws are determined by the orbits of the planets. Our physical brain follows the laws of science in determining human actions and not some agency that exists outside those laws” write Stephen Hawking and Leonard Mlodinov in The Grand Design  published in 2010.

As the cycle begins to unfold, Waves I, III and V of the bull phase form long impulses corrected by the short retracements of waves II and IV. As a rule, corrective wave II does not fall below Wave’s I trough, and Wave IV does not fall below Wave’s I peak. Likewise, no corrective bull or bear market wave exceeds the span of its adjacent impulse swing. Impulse Waves I, III, V. A  and C have longer durations than their corrective counterparts (see Figure 2 “Unlocking the secrets of Gann: Will the market crash in August?futuresmag.com)

As the market changes direction, the pattern reverses. Downward trending waves A and C turn long, while upward Wave B ─ the only upswing of the bear market, turns short.

When corrective Wave II unfolds in a complex sideway pattern, of three lesser degree swings, corrective Wave IV manifests a sharp steep decline which typically brings down Waves’ I and III advance of by 50%. Elliott refers to the relation of corrective Wave II style to Wave IV style as “alternation of form” given often Wave II manifests a sharp decline and Wave IV zigzags sideways. Above all, the pattern demonstrates that the up and down swings of the cycle adhere to the boundaries of a spiral. As the market moves up and down, its peaks and troughs correspond to the Golden Mean 0.618 and 0.382% proportions (also known as Fibonacci), and their derivatives 14.6 ─ 23.6 ─ 50 ─ 76.4 and 85.4% (Figures 1 & 2).

Metaphorically, the ‘Wave Principle’ is a road map for the analyst to negotiate the market’s alleys, streets and freeways. Once the market’s position within the pattern is clear, then the way ahead shows the direction of the next swing. The Nasdaq 100 Index at present is at the cusp of bear market Wave ‘B’.

 

Figure 1 – Elliott’s cyclic model of five-wave advance and an A-B-C decline which subdivides into lesser degree  cycles, the smaller of which these constitutes 144 swings.

           

Figure 2 - Elliott’s cyclical expansion and contraction model adheres to a logarithmic spiral. 

Ancient use of Gann's Square -of-9 play out?

Next to the zodiac, the Square-of-9 was the world’s first measuring instrument. In ancient times, it tracked and forecasted the spans of seasonal inundations. For over 3,000 years, two adjacent time intervals, aligned on a Square, projected the behaviour of Babylon’s and Egypt’s rivers. A series of longer than usual flood-spans signalled a catastrophic swell, whereas abnormally short intervals spelled drought. The great 40 days and 40 nights flood related in the Genesis legend of Noah is almost certainly an allusion to the Square, given that Noah embarked upon building the Ark well ahead of the flood. 

The scientific transition from the 19th century to the 20th century was, by and large, dominated by Einstein, who sought to reconcile theory and experiment by unifying natural processes under one universal law. His Special Relativity Theory was a hot topic of discussion at the very time that Gann was on his quest to unravel the Holy Grail of markets. Gann was counting, measuring, and practising with hexagons and Squares of 6, 9 and 12 to identify the optimal geometrical swing/time relation at the instance equity changes its course. Yet, none of his records show any reference to Einstein and Elliott, the first famous the Relativity Theory, and the latter for his study of growth and decay cycles of the American stock market. Elliott’s book Nature's Law - The Secret of the Universe appeared in 1937.

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