Michael S Jenkins looks at WD Gann’s use of planetary location to predict price.
The opening lines of Gann's stock trading course state that ancient hunters, when tracking their game, didn't follow the game forward, but tracked them backwards to find their lair and then waited for their return. These first lines are a clue to Gann's use of cycles. Because cycles return, if you find their origin you can tell what they will do when they come back to a given point. Of course, Gann secretly meant he was tracking astrological cycles of various planets, but the analysis applies to all kinds of cyclic data. Gann also stated many times traders should look back to the last time a stock or commodity traded at a given price to see what happened. On the surface this seems like simply noting support and resistance from past highs or lows. But Gann was implying a basic principle of his method, which is that prices are translated from planetary longitudes into numbers. If wheat trades at US$2.80 a bushel it might mean a key planet is located in the zodiac at 2.8 degrees, or 28 degrees or 280 degrees. If you saw the prior high or low price of a stock or commodity and looked in a planetary ephemeris, you might easily discover what planet caused that top and when it might return, causing the same result. All of the dozens of 'Square of Nine'-type charts Gann drew were just a means of translating the 0 to 360 degrees of a circle into numbers that various commodities and stocks would trade at, so that Gann could more easily find the planet(s) causing the reversal or take an upcoming planetary location and predict price.
Last year in my April Stock Cycles Forecast newsletter I correctly predicted that the exact closing high for the year in the S&P would be 29 April. The newsletter calculated the date with a geometric method called the 'TCB' or Time Conversion Bar. It was verified by looking backwards, with the assumption that on 29 April and at a price of 1360 to 1370, a cycle of that length would be found in the past. Sure enough, that was the July 2007 top date in calendar days. Gann's theories suggested that the price number stocks sold at always had a time cycle element incorporated in them. That is why he suggested you always look back to the time a stock sold at the same price; but he also implied that price was a time cycle, involving days, weeks, months or planetary degrees in the past. The top near 17 July 2007 was 86 days before the 11 October 2007 final top and collapse point; if this cycle was to repeat we could add 86 days to our 29 April top to get 24 July 2011, the exact high before another collapse. Note also that the low on the S&P in July 2010 near 1010 was a nice numerical '360' points up to the 1370 top. If you take that 'difference' as a time cycle and go backwards 360 days from the 29 April top, you get the 4 May 2010 start of the slide into the 1000-point Dow Jones 'flash crash' plunge.
Going forward works too, but not always so well. Many more traders do it than work backwards, perhaps distorting the results. For example, the July 2007 top near 1555 came out near 19 October 2011, but the actual low was on 4 October. If we use the 'low' of the July top we get closer to 10 October. Our 'backwards' technique, however, can quickly check any date and see if a square out is possible. On 4 October 2011, the low was 1074. If we go 1074 days backwards, we get the date 25 October 2008, which was a good low; and at 1074 we would be 'down' some 296 points from the 2 May top of 1370. Back 296 days is 12 December 2010, which clearly was not any kind of turn. We can, however, use our typical Gann angles like 1x1, 2x1, or 4x1 and, since we had a steep decline, try for a fit here with these slopes going backwards. The drop of 296 on a 2x1 angle is 148 days back, for a possible origin point; and 148 days backwards from 4 October 2011 was 9 May, only seven days off the high...
Excerpted from an article originally published in the Mar/Apr 2012 issue of YourTradingEdge magazine UK. All rights reserved. © Copyright 2012, Your Media Edge Pty Ltd.
If you are a subscriber to YourTradingEdge magazine UK, you will receive this article in your Mar/Apr 2012 issue of YTE UK. If you are not a subscriber, click here to subscribe to our print edition, or to purchase a digital subscription, click here.