The building blocks of technical trading

December 23, 2016 09:00 AM
W. D. Gann and R. N. Elliott’s early work on graphs provided the building blocks of technical trading that are still in use today.

When W. D. Gann set out to investigate the behavior of markets at the end of the 19th century, the New York Stock Exchange records contained no more than 15 years of data. It was not until 1883, when Charles Dow and a fellow reporter, Edward Jones, introduced the first Dow Jones Industrial Average records in the Customers’ Afternoon Letter that American traders were able to track daily stock movements for the first time. 

The quest to find out whether the future was indeed unpredictable brought Gann to the British Museum where he came across the uninterrupted series of the Nile records. Going back to 622 AD, it was the world’s longest data collection at the time. It gave birth to the Square-of-9, the Time-Factor and Law of Vibration.

The practice of measuring river tides during the annual flood originated in Babylon and Egypt where year in and year out the behavior of the Euphrates, Tigris and the Nile Rivers’ dictated the peoples’ fate. 

Data collection coincides with the introduction of the Nilometer in Babylon and Egypt during the second Millennium BCE. Gann reasoned that the only way early civilizations were able to analyze records was by presenting them graphically. Furthermore, he realized that the ancients’ obsession with measuring time-sequences and patterns had inadvertently solved the mystery of nowadays markets’ ups-and-downs.

In tapping the secrets to time-based chart-analysis, Gann, in addition to reviving lost 3000 BCE cutting-edge analytical methods, ushered in charting to the 20th century. 

Fifty years on, Ralph Nelson Elliott demonstrated that the ups and downs of equity prices, along the graph’s coordinate –Y, unfold according to a repetitive eight-wave pattern governed by the golden-mean spiral and Fibonacci ratios (see “Graphing,” below). Prices regularly encounter resistance and/or support at the 38.2%, 50% and 61.8% retracement level of the preceding advance/decline. The “unknown known” about Elliott’s findings is that in addition to focusing on price ups-and-downs, Elliott paid attention to time-intervals. In his 1946 book, “Nature’s Law,” he stated, “Wave intensity or impulses bear a consistent relation to one another and to the passage of time”. 

This series of articles will provide an illustrated account of the differences between “time” and “price” peaks/troughs, the inherent relationship of the graph’s coordinates X and  Y to Gann’s Square-of-9, and how to employ all this in forecasting the future moves of the S&P 500 Index. 

The x & y coordinates of graphs 

Coordinate X is a symmetrical Archimedean-spiral featuring a constant separation distance at turns. 
It unfolds from right to left (counter-clockwise) in line with the spin of the solar system and all other naturally occurring spirals, including that of the Golden-Mean. The lack of a back-and-forth motion on this axis made it Gann’s principal source of information. It told him everything he needed to know about timing.

Coordinate –Y, on the other hand, is an asymmetrical logarithmic-spiral expanding at a 61.8% ratio throughout (refer to “Graphing” again). It is a form, rather than a measuring instrument.

Given that coordinate X is a function of Y, and coordinate Y is a function of X, their plots are related. The dotted line they manifest on the graph has the capacity to project the “price” and “time” of any future turnaround.  Yet, Y’s inability to generate a timeframe within which a market would turn makes it less informative than X. In order to geometrically map onto the Square-of-9, the Y coordinate requires a separate analysis from X. 

Even though Gann often called the price at which a market would turn, his two signature laws, the “Time-Factor” and “Law of Vibration” are based on coordinate X. 

As the saying goes, “When the time is right the price is right”, however, when the price is right, time may not yet be! 

Peaks, troughs & trend reversals 

Another “unknown known” is that major trend reversals manifest two successive peaks and troughs. It takes two peaks to terminate an uptrend and two troughs to terminate a decline. The first (peak/trough) records the price, and the second, which is usually belated by a few days (or weeks), records the date of the time-peak/trough. 

The peaks/ troughs of time and price rarely coincide. The price-peak/trough marks the highest/lowest price on the chart, whereas the time-peak/trough rubber-stamps the trend’s termination, mostly at a lower price-peak or a higher-price trough.  

“Time factor” (below) captures the S&P 500’s price and time peaks that terminated the 2007 bull market showing a 22 calendar-day gap between the price-peak of Oct. 9 and the time-peak of Oct. 31.


Given that the Oct. 19 to Oct. 31, 2007 interval was two days longer than the Oct. 9 to Oct. 19, 2007 interval, the longer interval terminated the trend. The Time-Factor indicated that it was the time-peak of Oct. 31 that terminated the bull market.

Furthermore, the Time-Factor stipulates that new trends begin with a longer than, or equal to, interval than that which terminated the previous trend. This demonstrates that following the Oct. 31 peak, the S&P 500’s first wave of decline exceeded the 

Oct. 18 to 31 rally. The October 2007 peak terminated a 150-year (1857 to 2007) bull market. The 1929 market crash marked the first wave’s peak, 2000 marked the peak of the third and the peak of 2007 terminated the fifth. 

For a trend change to occur, the second interval of a wave pair in which the first is going up and second coming down or vice versa, must be timewise longer than the first. 

A key rule of thumb is that rising markets, irrespective of scale order, manifest longer rallies than retreats; and falling markets, irrespective of scale-order, manifest longer retreats than rallies. The interval leading to the time-peak/trough is always followed by a longer or equal span. 

Time-peaks and troughs are exceptionally fine-tuned. It is where one day, hour and often as little as one minute, can separate a bull phase from a bear phase. This is why the universe’s cosmic clock is subject to the Time Factor — the “superintendent” of cyclic components and trends.

 Even traders with a scant knowledge of decoding charts can benefit from this law. No market will ever change trend without emitting an early-warning signal first (see “Golden bottom,” below).

In the next two installments of this series we will talk about the law of vibration, symmetry and asymmetry and the Elliott Wave Principle. 

About the Author

Pauline Novak-Reich is the former manager research-foreign exchange at the ANZ’s (Australian & New Zealand Banking Corp.) dealing room from 1980 -1993.