|Swing Trading with Range and Time Squaring|
|Swing Trading with Range and Time Squaring|
|Written by Jeff Greenblatt|
|Wednesday, 11 May 2011 11:12|
Gann considered his greatest discovery to be the squaring of a range with time. In my last article we discussed this methodology on a macro level. You’ll recall the Dow range in the 1987 crash phase to be 1108 points, while the time from the August 1987 top to the NDX bottom in 2008 was 1108 weeks. Since tops and bottoms are a process, this Gann cycle point was an important part of the bottom of the bear market. It’s important to understand macro issues because they help the trader to develop conviction about the current trend. However once that trend is in place, it’s equally important to be able to capitalize on bread and butter opportunities on the micro level. Once a trader has conviction about the overall trend, he needs to develop the same kind of conviction about the individual swing trades.
Figure 1 RIMM Daily
This is a recent trend in RIMM. Notice how price and time symmetry lines up. The first really good example on this chart is in mid-November when the pattern pulled back to the 55.49 handle in 55 trading days off the low. Price and time not only matches at 55 but it is a little more powerful when a Fibonacci number like 55 is involved. This condition created a swing trading opportunity until such time the chart hit the 63.94 handle in 64 trading days. This is important for a number of reasons. Price and time do match again. However, many people are looking to time windows exclusively on the Fibonacci or golden spiral time window. What that simply means is most traders familiar with timing cycles are looking for turns on days such as 55, 89, 144, 233 or even 161 or 261. These work, but if that’s all you are looking for, you’ll miss many other opportunities. For instance, this one turned at 64 days and then it pulled back by a grand total of 6.46. In this case it’s the range that matches both the price handle and time it took to get to the high at that time. That low was retested and never was violated as the pattern continued higher. This doesn’t happen on every chart but it does happen often enough. It does happen often enough that you can catch a few every month.
The whole idea of trading is be consistent over the long term, keep your losses small and allow a winner to run. How does one do that? It’s done by recognizing quality setups and having the conviction to allow a winner to run. But how do you know you have a winner? Different traders will tell you a variety of reasons but the theme will be the same. One must have an edge to recognize what a high quality setup looks like. Remember, this was one of Gann’s favorite tools. One can enhance this tool with a pattern recognition method like Andrew’s Pitchfork. One of the better setups in recent memory was this sequence in AMGN.
Figure 2 AMGN Daily
This setup has just about everything one would want to see. This sequence starts at the end of August where a rally begins and peaks in October. The ensuing pullback bottoms out at the end of November. From low to low, 65 trading days elapse. From the high in October to the low is a pullback of 6.55 as the range is from 58.74 to 52.19. The symmetry is enhanced by the fact that the low comes in at the bottom of the pitchfork channel. If you would have been trading this setup what would the target be? A good one would be the high end of the pitchfork channel. The AMGN trade was important for another reason. AMGN is a leader in the biotech sector and at the beginning of December the BTK (Biotech Index) was in the late stage of a 6 week pullback. By understanding the symmetry of a market leading stock, it is possible to leverage that information into being at the leading edge of a rally. In fact, when AMGN took off, so did biotech and that led technology in what ultimately was known as the Santa Claus rally of 2010. One calculation can be leveraged to an important degree.
Figure 3 CELG Daily
While this is not an article on pitchforks you can see how well it navigates the pattern. CELG peaked at 63.46. Our interest rose to the surface on the secondary high as it hit the 60.90 handle at approximately 61 calendar days off the top. Look carefully at the peak; it leaves a bullish candle which only came off the high near the end of the session. However from the next day when it started dropping, the high to high does work out at 61 calendar days. This particular sequence does take advantage of the golden spiral window at 61 days. One could have taken this trade when it formed the evening star the next day. Some momentum traders who prefer to trade on fractals may have elected the breakdown from the pitchfork channel. Gann stated in numerous places that he felt the best place to take a trade was from the secondary pivot. The reasons are numerous but not all secondary pivots are created equal. This one had excellent symmetry and led to a very important drop. It was the ‘classic falling knife’. What stopped this from falling further? Note the price at the top and then note where it stopped going down. It was roughly 64 trading days. While catching a falling knife is not recommended, the universal symmetry did stop the downtrend in its tracks and the price action was steadily higher over the next 2 months.
Figure 4 DUSA Daily Before
It seems that biotech always seems to capture the imagination of traders as well as the public when it comes to the risk trade and the opportunity to make fast money. In this case DUSA uses both Fibonacci and Gann methods as it reveals the setup. The pattern traces out a low at the 2.33 handle (Fibonacci 233) and also stops going down after a range of .42 in 41 trading days. It’s an excellent real world example of how to catch range squaring with price on a common stock. The next chart shows you the initial leg higher which was a burst of 39.4% over the next month but after a benign pullback in February 2011 it was trading at 5.97 on April 13, a move of 156% in 70 trading days.
Figure 5 DUSA Daily After