Price Time Volume Investing

Bob Campbell from the Fibonacci-Financial blog asked a number of questions in a comment and I am taking this opportunity to discuss how I use Gann Fans and Time Cycles. I will respond to his questions in the order asked, but may add more info than is actually inquired about.

You have sparked my interest, so please forgive me, I have a lot of questions. If I understand correctly the 150 and 180 day divisions are significant because they are 12.5% multiples of the time period from the last major high to the last major low.

The year has 365.24 days which is usually rounded to 360 to make the math easier. If you divide 360 by 2 you get 180. If you divide 365.24 by two you get 182.62 which is close enough to 180 for me. With cycles, there are no absolutes and no alarm clocks that signal the market to change. The market often changes exactly on 180 days, but may also change on day 178 or 182. Cycles and high/low prices are tied tightly, but are not an absolute. There are no absolutes in the market. I usually use the “ish” modifier to cycle dates and times as an acknowledgment of the fact that the market will do what it wants without regard to what I think.

Because 360 days can be laid on a 360 degree circle, the circle makes a nice tool for displaying cycles. My opinion is that the circle itself is not special but only a convenient tool that works nicely to calculate angles and to count weeks from a significant high or low.

Note how easy it is to draw a few lines which creates a different presentation of a 52 week calendar.  An internal rectangle breaks up time into quarters while a triangle breaks it into thirds.

Are these days expected to be reversal days, or are they there only to aid you when drawing the Gann lines?

The lines of a Gann Fan are progressive changes to the slope of a move by a factor of two. These slopes (and inverse slopes) provide a grid for measuring the strength of a move. The difference between a relative strength (RS) calculation and the Gann grid is that the grid will tell you how strong a move is with respect to previous ranges while RS compares price action to that of the universe of stocks.

The fan will not tell you where price will go. It will tell you if price is strong and if it continues to be strong then it should move to a specific level within a specific time frame. The market can change direction at any time, but the grid will let you see the change and therefore you can change your trading/investing plan.

I use the time cycles to clue me in to when to watch for a change in trend. History has shown that 30/60/90/120/150/180 calendar days are times to watch for a change. A normal move will last 90 days. A weak move will last less time. A strong move will last more than 90 days. Major moves rarely continue more than 180 days without a significant correction.  I am using 180 days to find a logical price for a top.  The 50% price level is logical.  Should price pop through that level then I am guessing that the 1×1 ascending angle will provide too much resistance to break through at 180 days from the low.

It also appears that you divide the price by 25% in order to draw your lines with geometric accuracy. Do you look for retracement in increments of 25% also or do you also use Fibonacci ratios?

The time cycles I noted above are natural time cycles that wind though space and time on a regular basis. Each individual issue has its own cycle. The equation of the cycle can be found within the price and time data from the past. Some people spend a lot of energy trying to find the “exact” formula. I have found that an easy approximation that works is to draw a rectangle around a significant range (high to low or low to high) and then break that down by 1/8s (or quarters if the cycle and/or price movement is short). Next, project that rectangle into the future and you can use previous moves to measure current moves. And you can then guess where price will go if nothing changes. It sounds simple. It is simple. And it works better than anything I’ve seen others do. It is not perfect. Well, maybe it is perfect but my assessments are imperfect – which is probably the case.

The one-eight divisions are very near the Fibonacci numbers. Because the market is not perfect (or my interpretation of the market is not perfect), I choose to use 3/8 (0.375) and 5/8 (0.625) lines instead of plotting Fibonacci numbers. Who knows? Maybe the 1/8 divisions are correct and Fibonacci just got lucky to find numbers very close to the truth… LOL!

Referencing your SPX_2007-2008 chart there appears to be a significant crossing of the 1:1 and the top 1:2 Gann lines near the end of August or early September. Is that a target price and/or a target date?

I’ve got to change the label on the 2007-2008 chart as it actually goes to 2009. Assuming the market continues higher, I believe early September must be watched closely. The 180 day cycle completes with the 3/8 cycle from the March low. I worry more about time here than price. I am watching about 65% off the March low as a signal to considering taking profits (assuming the market continues higher). The 1938 market moved up about 63% and that is a lot to expect in 180 days. The market always tops as it always bottoms. Looking back through history, I can’t find a time where the market moved over 60% and them continued up without a correction of many months – maybe years.

With reference to the 2008_SPX_30Jul09.GIF
It sounds like you had a target date and price at intersection of the 1:1 and the 1:1 lines yesterday at 1054. I’m wondering why you start counting from 19 May 08. That was just one of several peaks since 11 October 2007.

I use this range to judge the bounce against the steep drop of 2008-2009. The market moved up at a stronger slope than the decline for the first 90 days of the move from March. Remember how bad it felt when the market was tanking? Well it “tanked” for the shorts at faster rate than on the way down for the longs. Didn’t feel that way, did it? That is why I measure the market. I want to know what actually happened without regard to what I “thought” was happening.

Would I be correct to assume you could also make a chart using the 60 day period from 5 Jan 2009 to 6 March 2009 with 15 day intervals?

Yes, you could. It may have some interesting information. It may not. You won’t know until you try. But note, I only have a couple hours per day to chart the markets – if I’m lucky. I assume you have the same problem. So while you “can” chart every conceivable interval, you will find that picking a couple to analyze will work out better in the long run. Remember, the idea is to measure the current move against previous moves. Any interval you choose will work. Some are easier to draw and I use the easiest ones to draw I can find.

Hope this helps.

Related Posts

• Weekend Outlook – 29Nov09 (November 29, 2009)
• Picking Price “Targets” (September 20, 2009)
• Weekend Outlook – 23Aug09 (August 23, 2009)
• Weekend Outlook – 26Jul09 (July 26, 2009)
• Weekend Outlook – 12Jul09 (July 12, 2009)

Tags:   Gann Emblem · How To Use Market Cycles5 Comments