Gann Rules the Banks
There are many ways to analyse the markets. Literally hundreds of tools are at your disposal to help make decisions as to the right time to buy, sell or simply stand aside and wait.
In my 20 years behind the trading wheel I have yet to find anything that comes close to the combination of Gann and Fibonacci. These two theories, in combination and applied diligently with sobriety and with dedication, will surpass anything else available. The dilemma is that you have to make the time to put the effort in and relentlessly research this material, and our fast paced, immediate gratification lifestyles don’t fit with the mandatory effort to understand these theories.
Ultimately, as humans with all our frailties and egos, some will simply decry the work of Gann and Fibonacci as baseless and without merit, something we will immediately prove to be untrue.
Our case study today revolves around the stock Macquarie Bank. For those readers outside Australia, this organisation has been very well publicised in the past as a merchant bank with a penchant for unusual financing deals which invariably pay off handsomely. In some circles the organisation is known as ‘The Millionaires Factory” for some of these ventures.
Have you ever seen a better setup for a short trade?
Really? Did I read that right, a short trade? Surely not. The Dow Theory states that markets making higher tops and higher lows are in an uptrend and we never sell against an uptrend. Darvas theory, and indeed any other analytical tool you can think of, will not give you a signal to sell short here let alone close out or sell your stock.
Gann made a fortune in trading estimated at $50 million by 1955. In those days that was indeed a huge sum of money, not bad even by today’s standards.
Had Gann been alive today he would certainly have attracted scorn and raised eyebrows with his typical statement: “MQG will not go higher before it has a decent break”.
Let’s now look at why he was so far ahead of his trading rivals. The next chart shows a Fibonacci retracement tool from the previous major high and low on this stock. You can clearly see that the market is now at the 38.2% Fibonacci level and this is a known ratio for creating changes of trend or direction.
On its own, this is an important area to watch but it doesn’t necessarily indicate we should sell out of our positions and get short. What we do have is a price reason for a potential reversal.
Gann told anyone who would listen that time is more important in the market than price. One of his most misunderstood tools was the Square of 9. Fabulously recreated by Market Analyst, the Square of 9 tool is a delight to use, simplifying its powerful implications. On the next graphic you can see that the Seasonal date of Feb 4 is bold amongst the other dates. After many years of exhaustive research Gann found that this date has a propensity to create significant reversals of trend, so much so that you can watch any market for signals of changes around, or very close to this date and make great profits.
Now let’s revisit the MQG chart and see exactly what we have:
Here we have what Gann called “a conjunction of Time and Price”. This literally translates into a reason in time for a potential reversal and a reason in price for a potential reversal occurring simultaneously. Gann traders are now on red alert to exit longs and start shorting. The very next day confirms the sellers have arrived and now Gann traders join the rush for the exits and start shorting the stock.
The ensuing selling down of the stock can only be described as spectacular; it hardly came up for air as traders scrambled to get out of a falling market. Of course, educated Gann/ Fibonacci traders stood on the sidelines and watched their accounts grow as their short positions multiplied in value whilst the other traders fumbled in the dark in a blind panic.
The stock fell from a high of $41.95 on Feb 4 down to a low $33.61 on March 15th. In real terms that’s a decline of $8.34 per share from high to low or 20% decline in 27 trading days. If you had a parcel of shares in MQG worth $100,000 on Feb 4, that same parcel on March 15 is now worth $80,000.
I’m not suggesting you could or should sell at the exact high nor would you most likely buy in on the exact low, but you may have waited one or two days and then taken action to prevent any significant reduction to your account. Presuming of course you have taken the time to research the fabulous work of Gann and Fibonacci.
If you are interested in learning these remarkable tools I would be delighted to assist in any way I can.
Best wishes to all,