Wednesday, July 10, 2013

Unlocking the secrets of Gann: Will the market crash in August?

By Pauline Novak-Reich

Come the week of Aug. 16 - 23, the world’s largest Index, the S&P 500, will once again plummet. In an all too familiar fashion, it will drag down all other stock markets, superfunds and savings. No government or economic spin can ward off this descent, because nothing else but time governs the fluctuations of markets. Given that economic formulas and models are only pale reflections of the real world, as a forecasting tool, they can be utterly misleading. The way to gain insight into the forces driving the S&P 500 Index, and predict the Aug. 16 turnaround, is by consulting its graph and William Delbert Gann’s Square-of-9 (for why all Internet depictions of this Square are flawed refer to paragraph 7 below).

The graph’s coordinates X and Y, where X represents price and Y time, provide an untainted depiction of market behaviour. In addition to reflecting ‘price changes over time’, the plot of X and Y’s intersection points reflects also the perceptions, and thoughts, of those driving the ups and downs of price. Given that X is a function of Y, and Y is a function of X, and given that X is the volatile of the two, focusing on the forward procession of Y is far less challenging than the fluctuations of X (Figure 1).

Figure 1

There is reason to believe that when billionaire George Soros broke the bank of England by shorting the British pound on Sept. 16, 2002 and the AUD on May 08, 2013, the Y parameter and Gann’s Square-of-9 dictated his trades.

The first on the ‘to do list’ in analysing a graph is to determine the direction of the dominant trend. Figure 2 demonstrates that bearish trends manifest long down-swings with short upward corrections. And, as the market changes direction, its upward swings become longer in comparison to retreats. 

The schematic in Figure 3 captures the 496 calendar day (cd) GFC decline period (Oct. 31, 2007 — March 08, 2009), and the recovery phase (March 09, 2009 — May 28, 2013). It shows that the S&P 500 Index’s recovery, which at the peak of May 28, 2013 measured 1542cd, in addition to being in an uptrend, reached an all-time high.

On June 25, 2013, the decline from the May 28 peak measured 28cd. It was 3cd shorter than its preceding 31cd upswing (Apr. 18 – May 28, 2013). Given this Index’s bullish trend, the sketch indicates that the forthcoming advance, which cannot be shorter than 31cd, will measure 52cd on August 16, 2013 (Figure 3).

Figure 3

To validate these dates, we turn to W.D. Gann’s Square-of-9, however, before proceeding to the Square, a word about identifying markets’ major peaks and troughs.

Even though pricewise the peak of May 21, 2013 was the highest point the S&P 500 reached on the chart, it was false (Figure 4). Given that it was followed by a 3cd decline and a 4cd advance, the longer swing, irrespective of price, is the one that determines the top.

Click to enlarge.

W.D. Gann (1878 -1956) was 13 when he famously declared that “the future is not unforseen.” From the age of 24, the Sqaure-of-9 — a sequence of orderly numbers spiralling outwards in an anti-clockwise manner from the number 1 at the centre (Figure 5) — generated him $50 million from trading stock and commodity markets. 

“I soon began to note the periodical reoccurrence of the rise and fall of stocks and commodities. This led me to conclude that natural law was the basis of market movements. I then decided to devote 10 years of my life to the study of natural law as applicable to the speculative markets and to devote my best energies toward making speculation a profitable profession.”

The numerals 1-9 forming the Square’s first ring inspired him to coin the device ‘The Square-of-9’, and its geometrical divisions, cardinals and diagonals.

The Australian mathematician, physicist and meteorologist, Trevor Casey — the first known man to unravel the Square’s mathematical structure since Gann — points out that all the Square’s Internet versions are mathematically wrong. In The Square Spiral— the Mathematics of Markets (BookPal 2010) he explains that this Square is a spiral mimicking the Milky Way. As such, it unfolds from left to right, in the same direction as the galaxy, and each of its rings expands twice during one 3600 revolution. The first expansion takes place upon the Square’s north-western diagonal and second upon its south-eastern arm. Therefore, in contrast to the Internet versions, the north-western diagonal runs along the numerals 1, 2, 10, 26, 50…, and the south-eastern along 1, 5, 17, 37, 65….…∞. (Figure 5)

The other point he emphasises is that the Square is a calculator designed to measure time and should not be used in forecasting price levels. The 0.618 and 0.382 Golden mean proportions, known as Fibonacci ratios, are best for determining the support and resistance levels of price.  

Gann's Square-of-9 Chart

Figure 5 – The Square-of-9 constitutes a spiral of consecutive numbers unfolding outwards from the number 1 at the centre. Its numerals follow the anti-clockwise (left to right) direction of the Milky Way’s spiral. 

Gann’s breakthrough came about when he observed that time-intervals typically adhere to the Square’s axes in that they commence and terminate upon them. A mature interval bounces off and culminates upon the Square’s same axis by completing a 3600 rotation from and back to the point at which the preceding interval ended. In cases when a swing terminates upon the Square’s opposite axis, at 1800 angle, it remains unfinished until such time it completes a 3600 rotation to the axis it had bounced off.  Given that the present recovery wave took off the Square’s eastern cardinal, and must terminate upon it, the Square-of-9 makes is possible to forecast its maturity date.

Bearing in mind that deviations between calendar-time and the Square-of-9 are subject to “Time Dilation”, excessive or shorter durations need to be adjusted to the value of the nearest cardinal or diagonal. Special Relativity Theory explains this anomaly saying that when the Earth’s speed accelerates, the motion of time slows down. The S&P 500 Index’s time-frames during the GFC and Eurozone crises, and those of the current recovery phase, demonstrate this phenomenon at work (Figures 6, 7 & 8).

Click to enlarge.

Figure 6

  1. Sep. 01, 2000 — Apr. 12, 2003 = 922cd

             [The nearest value is 916, eastern cardinal - Figure 7]

  1. Apr. 12, 2003 — Oct. 31, 2007 = 1694cd

             [The nearest value is 1702, western cardinal – Figure 8]

  1. Oct. 31, 2007 —  Mar. 09, 2009 = 496cd eastern cardinal - Figure 7]
  2. Mar. 09, 2009 —  Apr 23, 2010 = 411cd eastern cardinal- Figure 7]
  3. Apr 23, 2010 — Jul. 02, 2010 = 69cd eastern cardinal- Figure 7]
  4. Jul. 02, 2010 — Apr. 29, 2011 = 301cd

             [298 western cardinal – Figure 8]

  1. Apr. 29, 2011 — Dec. 19, 2011 = 234cd
  2. [233 western cardinal– Figure 8]

Figure 7 – Eastern Cardinal

Figure 8 – Western cardinal

Allowing that the March 09, 2009 trough terminated upon the Square’s eastern cardinal, on day 496 of the run, the subsequent 2009 – 2013 recovery wave must also terminate there. On August 16, 2013, when it measures 1621cd, it and the 496cd downswing will form a 3600 angle upon the Square’s eastern cardinal (Figure 9).

Figure 9 – Eastern Cardinal

Harking back to Figure 3, we see that the recovery wave’s top, on May 28, took place on day 1542 of the run and culminated upon the Square’s western cardinal (Figure 8). However, given that it bounced off the eastern cardinal (on March 09, 2009), its rotation has so far achieved 1800 — an indication of an incomplete move. Note that the peak of May 28, followed by a 28cd decline, touched upon the western cardinal on June 25 at a 3600 (1542 and 28, Figure 8). The final 52cd advance of the recovery wave will reach the Square’s western arm on August 16, 2013, where it will once again form a 3600 angle. However, its total span of 1621cd will fall upon the eastern cardinal at a 3600 angle with the preceding 496cd of the GFC crash.

For three millennia the pharaohs of Egypt relied upon large rocks carved with horizontal lines to record the height the Nile’s waters had reached during each day of the seasonal inundation. Indeed, Nileometer records collected from rocks scattered along the Nile are the longest data series we have. And although large chunks from the BCE data are missing, the records we have go back to 624AD, to the day Cairo’s Rhoda Island Nileometer became functional. The sheer length of this collection speaks volumes to their importance to the then pharaohs and scientists today. Ravaging floods and droughts turned the Nile settlers into brilliant problem solvers obsessed with patterns, symmetry and time sequences. Their effort yielded the Square-of-9 — Egypt’s most guarded secret, which tracked the changes in the Nile’s ups and downs over three thousand years. Subsequently, the pharaohs enshrined it in the Great Pyramid’s tiers where the block arrangement of each mimics the spiral of the Milky Way. When pulled from the number 1 at the centre, this Square morphs into a pyramid (Figure 10). With no data-processing technology, the Square and graphs sustained the pharaohs until Egypt‘s fall to the Romans in 48 BCE. One can only speculate how much richer the pharaohs would have been had they also invented the stock market.

Figure 10 – The Square-of-9 constitutes an image of one pyramidal tier.


Much like the S&P 500 Index, the Australian ASX 200 peaked on Nov. 1, 2007 upon the Square’s western cardinal. It formed a 3600 angle with the preceding 371cd down swing March 07, 2002 – March 13, 2003 (Figure 10). Given that the 2009 GFC through terminated at 1800 angle, upon the Square’s eastern cardinal on day 496 of the run, it will remain incomplete until a further decline brings its day count (from the 2007 peak) to a value denoted upon the Square’s western cardinal. When, on May 14, 2013, the recovery wave peaked, it measured 1530cd, falling 91cd short of the eastern cardinal’s 1621. It is expected to land there on Aug. 13, 2013 (Figure 9).

Click to enlarge.

Figure 11

When asked “What is the cause behind the time factor?” Gann smiled and said: “It has taken me years of exhaustive study to learn the cause that produces the effects according to time. That is my secret and too valuable to be spread broadcast…” He died of heart failure in June 1956 and was laid to rest in New York’s Brooklyn Cemetery in a grave facing his beloved Wall Street. Just as the pharaohs departed leaving no clue to the secret they buried in the Great Pyramid’s tiers, Gann left us an image of one of its tiers, yet, withheld its layout and instructions of use.

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