Geometric charting is a highly effective way to analyze financial markets. It can provide unique perspectives to price action as well as desired targets in both price and time. Unfortunately this approach is shied away from by most mainstream technicians and traders. Instead they opt for the rather immediate information offered by the trusty world of oscillators and moving averages. This is certainly understandable: not only is the former not usually taught alongside the latter, but it requires a greater commitment of study as well as some good ol’ fashioned creativity.
It is the intent of this article series to establish the foundation of geometric charting while stimulating your interest to pursue further study. This article will reveal several take-away geometric techniques step-by-step.
But first, I would like to whet your appetite a bit for the subject matter with a classic example of circular geometry on the Dow Industrials (monthly):
This chart eloquently demonstrates the power at your fingertips; both major reversals (B & C), the initial minor top (A), the crash of 08 (B1) and the almost vertical climb of early 2013 (C1) are revealed as perfectly geometrically related to the initial downtrend of 2000 – 2002 (the hypotenuse of blue triangle, from high to low). In addition, this geometry has speculative value. The market is expected to continue climbing to the next circle (E), after a dramatic intra-month rollercoaster ride last October that resulted in a monthly close above circular resistance (D).
But of course, that’s only if you know exactly how to set price versus time… Shall we begin?
Laying the Foundation
Geometric charting reveals specific relationships in price movement by uniting a specific amount of price with a specific amount of time. This is referred to as the ‘price lock ratio’ on the Market Analyst platform. There are several highly effective ways of determining this:
- Traditional method (as developed by W.D. Gann and others) which is based on 1, 10, 100…dollars or points per unit of time, i.e. $1/week, 1/month, with higher price action using 10/time unit or even 100/time unit. Fractional amounts are manageable for daily charts (50 cents/trading day if $1 produces an unusually large chart) and even 10 cents/hour for intra-day charting, etc.
- ‘Relative Charting’ (my term) which uses actual price action (usually a trend/vector) set at a particular angle. Such was the case in the Dow chart. Although I have been developing this approach since 2010, it is likely others have as well.
(Note: We will initially focus on the traditional method, and feature Relative Charting later in the series.)
Now to demonstrate by comparison the simple yet incredible power of uniting price to time. I will take you step-by-step through a geometric analysis that I did for a colleague recently, starting with what we normally see when opening a chart:
When a chart is first generated, usually there is an auto-fit function that scales the price action neatly within the chart, naturally using the highest-high and lowest-low within the timeframe given. Chart 2 shows this occurring for the Saudi stock market (TASI) monthly. Notice with my vector tool at 45 degrees, the price/time ratio (shown as ‘VR”, or ‘vector ratio’ in the tool’s text) is 233.4354/M (green arrows). The Vector tools used here form part of the Hathaway tool group which can be purchased for your Market Analyst program.
Upon a casual glance of price action, I naturally wanted to first determine whether or not the recent low was a new major low just like the preceding major low in 2009. In an attempt to determine this, I want to see if it is somehow directly related to the 2009 major low, especially if it is in a way that is not demonstrable with any smaller preceding low in between.
Vectors are drawn from the all-time high to both lows (A&B):
The point I wish to drive home is in this auto-fitted price/time environment, these two relationships do not appear related to each other, at least not in size, as vector B is quite longer than A.
But looks can be deceiving! So let’s change how we are looking at it…
To establish a potential geometric relationship between the two lows, I will need to first establish a specific relationship between price and time1. Since the market has such a high price range, (the top is almost 21,000) I will use 100 points per month:
Here, the price lock is set to 100/M. Now a 45o angle moves at exactly this relationship (black line) and can also be referred to as a ‘1 by 1’ angle, or simply 1×1. This implies that 100 points vertically equals the same distance as 1 month horizontally. 1000 points is covered over 10 months, 10,000 points is covered over 100 months, and so on…
Now do you notice a similarity between the two vectors? If so, how do we geometrically prove it?
Note: To set the price lock in Market Analyst, select the price lock value at the bottom right of the Market Analyst screen, and enter the new value. The Market Analyst chart will automatically rescale.
Applying a Geometric Tool
Time to use some ‘circular thinking’ akin to the geometry on the Dow chart:
A circle is drawn (using my vector concentric circles tool) using vector A (blue) as the radius with the high as the center. The recent low is exactly on the circle, revealing that from this crucial geometric perspective of 100 points per month, this low is the same exact distance from the high as the previous major low, as a crow flies, so-to-speak. As such, it provides a geometric rationale for the reversal itself. Note that the previous minor lows do not fall on the circle.
Indeed, the recent low is harmonically related to the previous major low and the all-time high, establishing its importance as a buying opportunity, and an overall bullish outlook.
Now for some extra credit. Let’s look a little deeper into this geometric environment and provide for the overall market action by dividing this major circle using a particular ‘fractional harmonic’ of 11th’s (starts with 1/11, or .0909…) as shown by the red dotted circles:
(OK, now I’m just showing off a little…) Additional reversals of note are given, with the first three occurring before the major low of vector A?!?! This aptly demonstrates a phenomenon I have constantly observed since taking up this craft:
Notice the recent high is also at circular resistance (red arrow), which when followed back in time gave temporary support during the massive decline. However, a horizontal line on a normal view of a TASI chart would not have offered this unusual support and resistance!
As for now, the current market is breaking (and has successfully broken as of this writing) its initial resistance. Each circle provides a future potential short-term reversal. Resistance at any of these should be taken seriously, especially if concurring with resistance from additional analysis.
Geometric charting is a highly effective way to reveal hidden relationships in price and time, by uniting price and time. As shown in the TASI chart series, by using the specific ratio of 100 points per month, the recent low was revealed to be perfectly related to its preceding major low from the vantage point of the all-time high. In addition, concentric circles using the fractional harmonic of 11th’s revealed additional turning points, and are useful for potential future shorter-term reversals.
- If an important geometric relationship, such as an angle, shape, fan lines etc. (all to be taught within this series) occurs while the chart is still in auto-fit, it is random and meaningless. Unless of course the price/time ratio coincides with an important ratio! This is usually not the case.
- This particular chart, along with the Dow chart reveal larger defining moments in market action, but the smaller ones can be revealed using smaller timeframe charts.