Squaring Range and Time with Current Conditions
According to Gann, squaring price range with time is one of the most important and valuable discoveries he has ever made. I have found that years after his death, this methodology is as relevant today as it ever was back in the day. Gann’s price and time squaring methods have handprints all over the current action. In this article we’ll take a look at how it has affected US equity markets.
First of all, we go all the way back to the 1987 top in the Dow. The high was 2746 and bottomed out at 1638 after the crash. That is a range of 1108 points. From that very same 1987 top in the Dow, to the bottom of the NDX bear in November 2008, was a time span of 1108 weeks. What makes this more complex is we have a hybrid situation of a Dow range and an NDX bottom. Nobody ever said this was going to be easy.
By the way, the NASDAQ bottom in 2002 was also 1108. It’s important to note the current bottom in the NDX is tied geometrically to a range that materialized 21 years before, likely with an entirely different set of market participants. It’s also important to realize since the current bottom in technology is tied to events a generation ago, this is likely to be a bottom long term in nature. We are coming up on 2 years and now not anywhere close to testing it.
This is a chart of the SPX from the 2007 top of 1576.09 to the 2009 bottom at 666.79. The range is 909.30 points. This would be easy enough, all we have to do is take the high on October 11, 2007 and project out to the April 26th top in 2010.
The only problem is that it doesn’t work because that comes to 928 days. However, there was an alternate top in the markets as the NASDAQ and NDX topped on October 31, 2007. The span in time from October 31, 2007 to April 26, 2010 is 908 (+/-1) calendar days. The market does a great job of not making it obvious, and nobody ever said this was going to be easy.
What that calculation told us was this could be an important top, but since it is only tied back to relationships only 3 years old, it wasn’t likely to be as important as the 1108 sequence that spanned 21 years. As of this writing, the NDX was already above the April 26th high, but if range squaring time is so important, how did the April high last only 25 weeks?
As we’ve seen, one way to square price and time is by squaring the range with time. It also works the other way where we square the time with the range. In the prior examples we used calendar days. It also works with trading days. In this case our margin for error is greater than the usual plus or minus one. The NDX had 357 trading days up and a range of 2059 down to 1700, a range of 359 points. Prices turned back up in July after a big selloff including the Flash Crash in May. Not many people thought the April highs could be challenged so soon.
However, once the square relationship showed up, a retest of the April high became a greater probability. What is the new square telling us? It is telling us the low in July may be as important as the high in April. Both are tied either end of the bear market. One scenario would have the markets in a tight trading range above July and a test of the April peak. Since the April pivot is of intermediate degree, if most of the market were to take it out we would be heading for a retest of the 2007 top. Wouldn’t that mean a new bull market? It would but there is only one problem standing in the way. The most important sector isn’t even close to taking out the April high.
We have a market and a world economy that is led by the banking and housing sectors. The BKX has lagged horribly since April and is not even close to testing it, let alone taking it out. Until the banks can take a leadership role, it is a lower probability that we can get a serious challenge of the top. But since banks did so horribly in August, it was really a surprise to see the markets do so well in August and September.
At the end of August another prominent range presented itself. From the top in 2007 to the bottom, the Dow dropped 7728 points. From the bottom to the August 2010 low was another 77 weeks. The rally was unexpected and was very strong. Given the fact we have the square in technology back on July 1, there is now 2 key squaring relationships coming off the July pivot low. On any downturn, this area should act as strong support.
On Monday October 18 the SPX had set a new high and the significance was it was exactly 157.6 weeks off the October 2007 top of 1576. There was perfect symmetry there. That could’ve been a turn like some of these other examples, however it was taken out only 3 days later. The implications of violating one of these relationships can be profound. By early November the SPX was also above the April high which was 36 points higher than it had been on October 18.
At the time of this writing, there are several other important square relationships that were pending. For instance, the NDX had reached 1108 points off the 2008 bottom for the move up the week of October 25, but had taken it out by a handful of points by the end of the week. The Dow and SPX had trouble with that high but once it had taken it out, went on to go above April as well.
Our final square relationship has the NASDAQ top coming in at 2861 in 2007. At 288 calendar days out on August 15, 2008 a final pivot high was made in the bear market rally as the Russell 2000 put in a new print high that day. While the NASDAQ didn’t confirm it, once price and time squared in that sequence the real crash part of the bear market accelerated. What the following chart shows you is the fact when price and time do square it has the potential to create an important support or resistance line. That general area was retested in April 2010 and once again in October. Is it a coincidence the 1108 price range relationship is in the same area? My belief going forward is this line will continue to be an important balance line for the market. It’s possible markets can wrestle with this area for a considerable amount of time going forward. It can and will go higher but it’s likely to retest it again.
Gann said this discovery may have been his most important and allowed him to forecast markets with great accuracy. As you can also see, one has to dig below the surface to find these relationships because while it’s a simple concept, the market does a good job of concealing the relationships.
Finally, the flip side of this method is while it is very good at capturing turns, when these relationships are violated as you’ve seen in the cases of October 18 and 25th, they act as continuation signals. In the bigger picture, April and its excellent price and time relationships have been violated. In the case of the NDX we are already considerably higher.
Sometimes they are the only signals the market gives in highly emotional markets.