years, etc., wil _avartered by the tradable unit that is prac gonals, that subdivide this square, sive rise to. trendlines that are the critical | for that particular stock or commodity. These” trendlines can be subsequently continued into the future for any length of time, so you will know all possible support and resistance levels for any foreseeable time period. Because this principle is the basis of all charting, we can use a facet of it to quickly determine where highs and lows will come out in the future or meet massive resistance and support. This application comes from the observation that, in constructing a square out of building blocks (more commonly known as a cube), the smallest divisible unit of that cube is each side, or the square toot (actually it is the cube root, but we are only looking at the two dimensional side, since that is all we chart on paper). There is no other fundamental unit that will construct the square. On a more minute level, the reciprocal of the square root represents a single building block, but, for our purposes, the main side of the square is the foundation. Jt stands to reason that this square root being one of the fundamental building blocks of the cycle will appear as aunit or anexy now the square root is 10, we can surmise that minimum fluctuations _ $10, $20, $30, etc, ‘Thistype of simple increment is easily utilized. Qn a more advanced level, we look at expansion. sequences by starting with the rootand incrementing it, then squaring the incre um. We _ square I to get our target of 1 it s, however, 21 units from 100: large ing unit, so we would want to increment the root 10 by fractions such as.25, or 10,25 squared is | is 110.25. Many of I immediately jump tothe enlightened cor sus ion of using Fibonacci increments like .618, 1.382, 1.618, etc., and that would _ be a step in the rightdirection. __ In regard to the market averages, almostall the past highs and lows in history are related to one another by a square root sequence. For years, it was an addition of 5 to the root, but lately ithas advanced to double digit increment levels. The real key, of course, remains to match both the_ increment support and resistance levels to a commensurate time cycle, sothat both time and_ price come together at the end of the cycle, Only then will you see the final highorlow._ W.D. Gann formalized this process ina chart he called the Square of Nine chart, since it had at its core the first nine numbers. These numbers were arranged in a circle and a large cross. North, south, eastand west were drawn through the number spirals. The numbers incremented until they made a full circle, then jumped to another rung to make the next larger circle. I am sure most tradershave scen this wheel or even uscit daily. A whole book could be written about its origin, but, forour purposes, you should know that itis a simple square root calculator and to go completely arotind one full circle from any starting point and back, you simply take the square root of the starting number, add 2 and square. If you want to go 90 degrees from any origin, take the root, 34add .50 and square. To go exactly opposite the origin number, add | to the square root and square. Each of the 90 degree rotations provide resistance to both price and time, so here too you would like to have multiple correspondences for accurate results. The beauty of the drawn circle arrangement is that all numbers line up in the four cardinal points ona straight line, and ‘one merely draws a circle around the past high and low numbers to see if they fallina line or obvious sequence. Once this sequence is determined, you have the eternal key to that stock or commodity. Gann Square Of Nine Chart ‘Theabove Gann chart starts in the center (blank) and proceeds outward by the numbers. Especially note that the first circle of numbers stops at 9 and then starts a new circle with 10 to 25. Each circle ends at the square of odd numbers, as shown in the line drawn down from 9 through 25, 49, 81, etc. The opposite part of the chart shows the even squares of 2, 4, 16, 36,64, etc. Note that if you take a number suchas 46, calculate the square root, and add 2, you will get 77, the next number down on the chart. If you add 1 to the square root, you get 61, which is directly above 46 on the upper half of the chart. If you can imagine the orbits of an electron and the fact that the electrons when stimulated can + “jump” to higher or lower states, then you will have a better appreciation for what happens to stocks when they enter one of these new circles. Also, note the natural phenomena that higher 55Priced stocks move quickly and further between corrections than lower priced ones. On the chart, these are the numbers ineach “rung” of the circles which have more numbers as you go tohigher cycles, Finally, note the chart is not complete but can be continued to infinity, and you should make your own up to 4000 or so, if you trade the Dow Jones Averages. In theory, this is a generalized chart based on the natural numbers. In the case of specific stocks, you might want to start your chart with the multi-year extreme high or low price in the center and cycle up or down from that price to get very specific price pattern identities. Day traders will note the simple butextremely powerful technique of incrementing the roots of the S&P Futures or the OEX. An S&P number, such as 465 whose root is 21.5638, can be incremented or decremented by sixteenths to get the following sequence: 465, 467.70,470.40, or 473.12 for the upside targets, and the decrement would be: 465, 462.31, 459.62, and 456.95 for three sixteenths, Number sequences other than sixteenths could be used if. you find them more appropriate. The root increments of .25 representa 45 degree rotation around the Gann Square Of Nine Chart. Again, I wish to stress that the information in the above few paragraphs is quite valuable, and you should make sure you thoroughly understand the concept before going on. The following are examples: eer i sh Homy j ‘y ‘1 jt \ i ti v i It Hus chore re Woeth «nc 1 1000 Times The Cost Of This Book! Be Sure i ‘You Understand It. oes) wt Note Highest Price=483.10 f hi Lowest Price=466.50 1 hy yt lah ool | el te Sq Root 483.10-21.9795 i Equals 21.5975, That Squared ~ 466.45! ss : v3 126 1? 128 1M a 22 2 24 27 ae 29 218 850 Top 50 time unit square and support and resistance Note Trendlines arise from diagonals of 50 unit square hh " ty yl Y Ends of square are time cycles | \ 56My Geometry book goes into gre: Squares, and you should study _ work if you want. a rap the reality behind the idea. For our purposes here, however, it to keep track of time cycle counts from importanthighs and (0 construct a sa " around the Bee ee equal to that pri etric square or circle figure will point to the _target, but one of the real secret keys to forecasting is to use the Gann Master Time and Price _ “Calculators. Few people understand these, so be careful if you spend a lot of money acquiring them, In principle, they work off the Square of Nine or the “Octagon Chart”. As previously _ explained, this is a root calculator, but more important than the price levels shown on this _ chart (which is all 99% of the traders bother with) is the fact that these numbers represent_ _harmonic time periods from past highs and lows. The procedure is to find where you currently . erms of time, by noting the numbers in the wheel and converting them todays, weeks, or months, from a past major high or low. Once you know where you currently are located on the chart in terms of an angle radiating out from the center, you can then movealong that angle — back to the previous cycle in the immediate rung prior to where you now are. You then go back to a chart on that prior calculated date and find out if it wasa high or low. Your current forecast on the present calculated number rung will likewise be the same -- that is ahigh if the prior one was high or a low if the prior one was low. It is important tonote that, going — back to the prior theoretical date on the wheel, you may find, on your actual historical chart, no high or low on that date. Thi locke forward or backwards from that heoreticaldate by usually 308 trading daystofind the ~ actual high or low, and then you forecast that the current cycle will come out plusor minus that __ same amount of time this year as it did in the priorcycle. If it was 4 days early last time, it will be — 4 days early this time. Importantly, it will usually be the same character -- a high or low. Once ~ again, I will not show an example inthis book because it is too important. If you desire knowledge, _you must do the work. I will just point. 57Waves Waves are really just recurring pattems that have a specific shape and can be used for predictive purposes. Although there are an infinite number and type of waves, the most common have traditionally been classified as five wave movements fora primary trendand three wave movements for the counter trend. A five wave pattem realistically has but three upward movements separated by two downward thrusts for five in total, but three. goingupand twogoing down. At the end of all five, the big counter trend movement takes place in three waves or two down separated with one up. This is fora primary up trend. A primary downtrend would have five waves down and, at the end of that, three counter waves up. Basically, the most important point js that when you see five _ waves clearly know abig change in trend is at hat Waves can often be difficult to see in complex price structures, but when obvious do giveadded value to the overall chart interpretation. Oftentimes, the use of parallel channels on the data will make counting the waves easier, since each time the prices hit the top of the channel and turn down, that isa wave top.'The touching of the lower parallel channel is the counter trend wave inan uptrend. The idea, of course, is to buy dips and sell o knowing where waves end and begin tellsus where to buy and sell. Th i pattern looks as follow: 5 Wave Downtrend note 1, 3, 5 are down 5 Wave Uptrend note 1, 3, 5 are up 58Usually waves can be identified quickly, through the use of parallel channels. The touch points of the channel lines are where the waves peak, and you can make a quick approximation of the number of zigzags that way. “Most waves form these 1.3, 5 structures in the primary trend; that is a5 sequence fora___ Parallel Channel Wave Counts End S main up trend and a 5 sequence when the main trend isdown. Ifyou see. a dramatic movement of _ only 3 waves, itis probably a counter movement to the primary trend which will shortly revers This idea of waves and parallel channels gives rise to aconcept of retracement levels. Remember, ‘our strategy is to identify the primary trend and enter our trade with the primary trend but enter it ‘on the little counter trends. That is, buy the dips or sell the rallies. Obviously, the “dip” cannot exceed the primary impulse movement, or it would not be adip. So, we watch for retracements, Retracements are usually 25%, 33%, 38.2%, and even 50%. Normal counter trend movements stop at these retracement levels and then resume the main trend again. Ourstrategy, therefore, becomes one of judging the momentum of the counter trend correction_ into which we will make our entry into the trade. Then guess its most likely percentage and buy in. (if itis an uptrend), placing oursell | stopdown at the percentage where we know we are wrong on_ our guess. For instance, if a stock advances from 20 to 30.and we think a 50% retracement likely, we buy on a dip to 25 and use 22 (down 80%) as our stop, since a correction that big is probably not a correction at all but the primary trend and 20 will soon be broken. This strate; accomplishes two very important things and will be the key to our success as traders. forces us to buy against the minor trend and thereby mitigatesagainst our becoming emotional and_ impulsively buying just to satisfy our greed, but forces us to have a plan. And second, we can clearly define our risk on the trade to only a dollar to two. Whereas others may be holding stock ~ from 30 and have a big loss by the time it hits 24, we only have a modest loss of $1 and can easily ~ handle that situation without getting emotional. When we later look at cycles, we will adda third “element to the buy equation: time. That will further define our risk to a set number of hours of ~ holding regardless of price damage.Impulse Waves Impulse waves are the initial thrusts in each wave series. This first primary thrust can tell us a lot about future price trends and targets. Obviously, an impulse wave implies, by its very name, a powerful momentum thrust. When you see an impulse wave, donot think the current trend will reverse any time soon! Recognizing an impulse wave will keep you with the primary trend and even help identify it for you. For example, when prices seem to be randomly ‘bouncing around in a flat, usually a big impulse bar will occur every so often. The direction this “big” bar takes points to the primary direction of the movement, even though it quickiy_ _Seems to reverse. Unless you get a complete 100% retracement of the impulse, do not assume the trend has changed. These big bars are also often accompanied by “gaps” in the chart, and” looking for gaps is a good practice when first picking up a chart. The gaps indicate extremes _ of emotions and big supply demand imbalances. Remember that the purpose of identifying the impulse wave isto not only respect the trend, but once we identify it as an impulse, we know there w waves coming. Sowe can set up long_ term trading strategies to buy into waves 2 and 4 and watch forthe end after five. Impulse waves frequently rise along strong angles, such as geometric angles of 4x | or 8x 1. ‘These big momentum angles are also a tip off asto the strength of the move in progress. In S&P futures trading as well as other leveraged futures markets, the big impulse wave bar on the chart signifies a time period to buy every dip over the next several bars on the chart, Trends usually persist, and the number of bars after the impulse that the trend continues is at least three bars but usually a fibonacci number like 5, 8, 13 or 21 bars in the same direction. It is nice to have the confidence that amove will last this long and stay with it, and identifying impulse waves gives us that, The second major help impulse waves give usis for measuring the distance of the move. Usually, the final high or low is a multiple of the impulse distance. If the Dow Jones Averages impulse up 50 points, we could multiple that amount by ratios like I, 1.618, 2, 3, 3.618, etc., times the initial thrust. Remember, also, our previously mentioned secret of laying the signal bar on its side horizontally to measure the time distance of the move. 7 60,Examples of Impulse Waves: a j Typical Impulse Wave Arising Out of A Multiple Bottom Flat }t+{ And Then Exploding Upwards At A 60 Or 90 Degree Angle 131 Seay 127.2 4 apc B00 7 pot a =z| Initial Impulse Followed By AS Wave se 32] Decline Back To The Low To Close i) A Gap And Make A Double Bottom ; 61Multiple Impulses With Big Bars And Gaps With Volume 62Angles Retracements are easily calculated, and although you could spend most of your time calculating them and recalculating them, I cannot spend too much time in this book on such a: imple subject. What I can point to, however, isa simple technique that actually keeps track of retracements automatically and requires almost no work. This isnothing more than angles. Not simple trendlines most traders use but "geometric timing” angles. These are called geometric angles because they subdivide time and space or price movements into proportionate fractional parts, These fractional parts are our percentage retracements, and when a geometric angle breaks, we know the trend will mostlikely continue to the next angle retracement. ‘The most basic correction is the 50% retracement. This is represented by the 45 degree angle. This angle is the diagonal of the square, and we know that a diagonal evenly divides a square, so we know it represents a 50% measurement. This angle isreferredtoasa I x | angle because of this equality of time and price. accounted for. Remember, we are e measuring vector distance of time and Space, or price, soa sideways movement coupled with an advance or decline represents more than just the price ovement. You will have to contemplate this, concept long and hard if you want to make real progress. This is the reason that any price decline toa 45 degree angle represents a 50% retracement, no matter what the price decline has been. Along that 45 degree angle, time and price are equal with the origin point of the angle. We are over the exact same amount we are down. Ifa stock goes, up 10 dollars, sideways two months, and hits the 45 degree angle coming up from the low, it HAS corrected 50% when it hits that angie. You may have to take a few years to contemplate the nuances of thisprinciple, but for now please memorize it. Since geometric angles evenly d time and space, they are represented as divisions of a: square and designated as one by one, two by one, four by one, etc. These are the units up versus over or time and price. 63These angles are timing lines in that prices falling along these angles are at an exact fractional proportional movement from the origin to that point. The primary rule isthat when you break one _ angle, you must go to the next. That can either be a drop or rally to the next angle or a long consolidation until the next timing angle reaches up to hit the current price. In either event, the current rate of advance or decline is over, and that would require a change in trading strategy. If one were to merely draw these angles with a compass, you would find the 8 x 1, 4x1,2x1,1x1,1x 2,1x 4, and 1x 8 angles equal to 7.5 degrees, 15 degrees, 26.25 degrees, 45 degrees, 63.75 degrees, 75 degrees, and 82.5 degrees, respectively. This is shown as follows: SRP AAD RTE TANCE AER TE PROBS “tN eee Sey [ee AN pty 64Angles are a very important means of measuring momentum and the steeper the angle, the more powerful the move. By measuring the steepness of angles, we are forewarned of changes in momentum and coming changes in trend. Anglesare usually drawn up from lows and down from t timing anglesare used tomeasure_ precise turning points where they intersect price harmonics. For instance, an angle drawn down from atop at 50 ona stock would identifya time area to expect a tum when it reached the major tice harmonics of fifty, like 37.5, 25, 12.5, and 0. These are quarters of the price of 50, and even though the price itself may be located on the chart elsewhere, when the timing angle hits these. important numbers, a tum is indicated in that time period. Major movements occur when time and _ price “square out” or reach the full price, such as a decline of the top angle all the way down to 0 oran angle started up from zero directly under the high of SOand at a later time intersecting the_ Price of 50. At these times, in particular with the 45 degree angle, time and price are in perfect balance, being over the exact number of units as the price was at the top. These “square outs” look like diagonals of squares and as thus called square outs, since they represent a square orbalanced harmonic of the price. An angle coming down froma top and one coming up from acompletely _ different lower price would intersect at the common mathematical vectors of the two Prices,anda major turn would be indicated at that point. This is called “squaring the range” or the price difference between the high and low swing._ - ~ w angle: Ati emely importa ay up from zero and down from each high to zeroto _ see major turns. Most charts do not cont the scale down to zero but only use the relevant trading range. In these cases, you MUST find the location of the actual zero price and continue your angles until they reach that critical point. Additionally, an angle coming up from zero, starting under any high, will almost guarantee major support the first time it rises high enough to hit the current price level. The vast majority of traders do not do this and miss out on the easiest and strongest support point for the stock or commodity. Keep in mind that if your paper or scale does not have room to draw down to zero, you can “tic tac” back and forth / up and down at price harmonics until they add to the appropriate amount to reach zero. For example in the 50 price example, a 45 degree angle drawn from 50 down to its quarter point of 37.5 could then be turned back up to 50 again which would be the midpoint, then down to 37.5 again to represent 25% and finally back up to 50 to get 100% or the zero angle point. Most people do not realize it, but this is where you often find cycles of “x” units which are really just these tic tac harmonic points froma past major high or low being worked out. Whole books have been written on angles, and I hesitate torewrite them, so | refer you to my other writings and other books on the subject. lurge you to do so because the information obtained will be valuable.‘Square Out Complete When Are Hite Zero Zero arice Lint "The above chart of [BM shows the importance of the “zero” angle technique. You should draw your angles up from the zero line under every major high and low of significance. When you do__ this, you will finally see for yourself why every single fluctuation into the future is accounted for by. a fluctuation from the past. Please spend some time with this technique. It will change your life! ‘Whaat is not shown on the chart, so as to not make it too confusing, are the 1 x 1,2x 1,4x I,and 8x | angles, or the 30 and 60 degree ones. Ifyou draw these in, you will see some startling results. Also, remember that the 45 degree angle is the master timing line, so if you watch to see: where this angle intersects the price harmonicsof its origin price (about 50 in the above example), you will see turns at each proportional price level. 66Lwould point out one other common misapplication of angles to charts, and that is the proper orientation. Just because we traditionally draw charts horizontally does not mean the prices are_ going in that direction. Remember to think in terms of time and space vector or circular distance. For example, most traders draw a 45 degree angle with a protractor from any high or low. This. may or may not, however, be the right slope. The real geometric angle bisects a square, and the only valid way to get an accurate angle is to find the directional orientation of the side of the square first. This side in vector distance is a straight line from the last major low up to that is this anglethat the 45 degree angle must be offset against to measure true support or resistance. If you adjust your charts for this critical slope, you will see a major difference! For example: Normal 45 degree ‘Actual adjusted 45 degree angle up from low angle offset from tow to high tal Wa Walp ee + sig" arse! ate" saetaes 2A 67Dew Jones Howry a2 aia | ate avis are” aie trae! ase" aa 24ty2g” a” ‘ow Some Hoarty th standerd fonedjusted) Deomevic ensles Note dWeresces between this chart and adjnted chart 'e accuracy of vend 600.8} inzs! 192 at 68‘The important angles to use are the geometric angles mentioned previously along with the normal trigonometric angles of 30, 45, 60, and 90 degrees. The strongest angles of all are the 90 and 45 degree, in that order. All right angle (90°) slopes hold powerful support and resistance levels and should be noted. Keep in mind that angles themselves, while useful, are much be jon with our other tools, like circular arcs coming to an end at an angle re angle. These tools, in combination, lead to very high probability trades, Another very important point concerns trading off of angles. Most traders buy or sell when angles are broken, and this is often profitable. This strategy misses the point, however, that angles are really timing lines or types of moving averages and should be actually interpreted as changes in momentum rather than direction. After a timing line is broken, we should watch for a technical signal to prove that the trend has reversed before making a trade. The angle warms us of this but does in itself notchange the trend. Remember that an upward sloping angle will be broken sooner or later, but that our definition of trend in a bull pattem is that of apattern which makes higher bottoms. These bottoms are from a horizontal perspective so the price level could decline under an angle but not break low enough to violate a prior horizontal swing low, and we should remain long in the trade. Think about this, and you will see the most common mistake all traders make when trading off of angles. This principle isalso the main stumbling block when deciding ifa long term Bull Market has come to an end. To be sure, prices must break a prior swing low, but trendline angles are often broken hundreds of Dow Jones points higher. This is one of the main advantages tousing cycles orcircular arcs. In a cyclical analysis, we can make a highly probabilistic estimate that the top is in long before either angles are broken or swing lows reached. Nevertheless, swing lows usually offer strong support when reached, anda final bounce offof them usually gives ‘one ample time to go short fora big break. Initial impulse wave is adjusted for true angle of slope (cycle #1). Note the horizontal line starting at this first top and see what happens when each geometric angle hits that first top! These are the cycles! 691 spent a great many years of my life studying angles, and many a book could be written about using them. You must not assume they are not important just because I have only devoted a few pages to the subject in this book. My object here is to simply give you an introduction and hope you will follow up. Suffice itto say, the greate fall technical analysi les! I cannot afford to reveal it in a book such as this meant for mass exposure, but if you follow up on the ideas herein, you may find it for yourself. ‘The following points are most important and need careful attention. Keeping in mind that timeand price must be linked, and we must matchup our natural calendar time with our work, you will note that the basic primary angles used for technical analysis consist of points per day, points per week, and points per month. All basic interpretation must begin with the geometric angles of Ix 1,2x 1, 3x1,4x I,and8 x I in terms of days, weeks, and months. All bull and bear markets beginand_ endon these angles, especially monthly angles. Its the intersection of these angles from past highs ring our cycles to a common time and price point 1ot demonstrate this point in an exhibit because it is too valuable, and those not willing to do some work do not deserve to know the truth. Youcan take my word that it will work every time, if applied. Fromeach beginning and ending of major bull or bear markets, you must start and maintain these angles. Another pointabout angles concems where to start them from, besides the obvioushigh orlow, ‘The theory of angles is that time au price are linked in an exact relationshi pan cour idea of sf 2 can never beexs ne | that angle i is reached th: same, _big momentum moves steeper ones may be evident. Parallel channels are often formed by these 45 degree angles coming down froma top and likewise coming down from the first bottom or last bottom just before the top. This parallel channel will define the downward movement. The upward _ Parallel movement is created with an angle up from the low and a parallel one up from ci __first top or the last top just before the primary low. angles for time and price change “square outs,” ¢ 45 degree di hitting the bottom level, and the 45 s degree up p from alow hitting atop level.” When usi down from the top Indeed, each past high and low will create cycle turns when angles down or up from those levels__ intersect, Since these intersections are numerous, we want to concentrate on only the larger ones for their greater influence. This is implied in the prior paragraph when I mentioned that all bulland _ bear markets begin and end on these angle intersections, particularly weekly and monthlyangles! 70Examples of angle techniques: s74.00 ( s7ace] sap Futures 5 Minute Chart High Low Angle Square Outs. Note The Change Ta Trend At ‘The Time OF Intersection. 7cel ce fae SSE AT ESL 64 GTS 70[ 74] 72] 73] 74] 75| 76] 77] 78] 79} 80] BI] 82" 83] Febed Aapuee setor swine e Ast High To Lam 72The Hourly Chart The primary chart used for forecasting and day trading the markets is the hourly chart. This is simply achart where each period bar is one hour’s duration. There is some debate as to how many hours should be in a daily hourly chart. At present the stock market opens at 9:30 AM and closes at 4 PM, ora period of six and one half hours. Many people use 10 AM as the first hour even though itis only ahalf hour. Others use 10:30 AM but end up with an extra halfhour at 4PM. The_ correct solution is to use a half hour chart since that correctly shows each period in an equal fashion, but the half hour chart is not as good for long term forecasting. My method isto use an hourly chart with six hours ina day with the first hour being 11 AM. This gives the firsthour one and a half hours, but this is far superior to the 10 AM method. Many times that first half hour ending at 10 AM does not include all the openings due todelays. Additionally I find that ahalf hour is simply not enough time to get traders to make a commitment for the morning. I have found that ‘it takes about 45 minutes to a full hour to get day traders tocommit and readings taken before that time period are ofien erroneous. Specialist openings where the specialist manipulateshis stock up or down artificially to get rid of, or purchase inventory, also affects the reading. This is done at the opening but is still often going on by 10 AM. I find that the 11 AM reading represents a smooth continuation from the prior day's 3 to 4PM hourly reading while the 10 AM usually gives an erroncous onc that iscrased by 11 AM. Suffice it to say Ihave made a study of the two charts and the six hour chart is infinitely superior. Afier several thousand hours have passed froma major high or low, the six hour chart still turns the market at the calculated hour, whereas the seven hour does not. I think at lot of the basic truth behind this has to do with the numerology of the number6. This is one of the masternumbers. In Genesis, God worked for six days and rested on the seventh. Six times six is 36 and ten times that is 360 the perfect circle and number of degrees of all cycles. I could go onand on about the number six but will have toleave some ofthat work to you. Basically hourly chart it will have six hours noted in aday. Those hours are I], 73The reason these hourly times are important is that trading can be very precise and the market will tum at cyclic intervals that are extremely precise. | have seen hourly culmination’s tothe exact hour several thousands of hours after an important high or low. For example if the Dow Jones had a_ major high at 3400, you could betanyone that EXACTLY 3400 HOURS later a major tum would manifest in the market worth trading, [he reason for this is not the purpose of this book but is covered at length in my other works. Incidentally I doubt many traders other than myself know this fact, but in August of 1982 the Bull Market started from a Dow Jones closing low of 770. In August 1987 when the market topped it was 7700 trading HOURS from that low! Coincidence? As traders we know the famous Fibonacci sequence of numbers that are an additive series starting with | and adding each number to its neighbor to get the next number in the sequence. Itgoes like this 1, 1,2, 3, 5, 8, 13,21, 34, 55, 89, 144, 233, 377, 610, . This sequence has the important property of demonstrating the golden ratio between its adjacent members. (divide any two adjacent numbers into each other and you get 0.618 and 1.618). The golden ratio 1.618 has forall eternity been considered one of the key building blocks of the universe and shows up in all of nature, mathematics, and stock and commodity market data. The lengths of various market movements are often Fibonacci ratios, and the simple absolute numbers mentioned above usually manifest like clockwork in turning the markets for trading purposes when using an hourly chart, Thatis to say.that fromcvery high and low we count 1, 3,5,8,13, 21, 34... hours, and we will find that m one. of these Fibonacci hourly counts. It_is extremely important therefore to keep track of “these counts on our charts. Most people are shocked at this simple fact when it is first pointed out but I assure you it is true and has worked for hundreds of years that I have examined data for. This greatly improves our trading since we now are not afraid of a reversal each and every hour that we are in a trade. For instance if we buy into a dip and the market does reverse back up, when do we sell? Most traders become shaken out of a position the very next hour with a small profit. Using Fibonacci hours, however, allows us to only take a look 8, oF 13 hours later and forget about worrying about the other hows intervals, If the, counting, ‘urhoursp paying attention at the Fibonacci tu intersect at certain time periods that also correspond to a Fibonacci time zone and therefore hold” high promi | for future - number of hours transpired from each significant high or low. Major: 7 occur at 100 hour intervals but particularly at the 500 multiples like. 1000, 1500, 2000, 2500, etc. _ Also of greatest importance is the long Fibonacci,counts of 1 382and 1618 hours. You will be startled if you examine these facts. 74Since these Fibonacci hourly tums work all the time, it sometimes can get confusing as to which hourly turn is the most important. The rule is generally the longer the sequence the more important the turn. Three and five hour movements usually cannot generate enough momentum to make big profits, but 13 and 2i or more hours in a trend is a good move (Remember with 6 hours in a day a 21 hour movement is over 3 full trading days! Additionally, counter trend movements will usually manifest for a Fibonacci period one o1 two less than the main trend, such as a counter trend starting at the 13th hour and lasting 8 or _ Shours, not 1, 2, or 3; and a 21 hour tum giving rise to an 8 or 13 hour reversal. _ Each of these main trends and counter trends arises at Fibonacci intervals and this leads to another important observation rule. This is, that at major turns worth trading we will see clustering of _ many Fibonacci turns. For example we may w: our charts the Fibonacci ourly _ sequence ahead of time well into the future so as to be prepared for future turns, From each high _ and low in sequence we make a “tick mark” on our paperevery 1,3, __ hoi each swit ig. What we will soon observe is time period clustering such as 13 hours from a low e three tums (13, 55, 21) all coming due at the same hour. That hour will very likely be_ major tum of significance. To plot these efficiently we usually make up a tape measure consisting of astrip of our graph paper taken off the bottom edge and on this tape we mark each Fibonacci_ hour of 1,3,5,8, 13,21 out into the hundreds if not thousands of hours. We then merely line up this tape across our chart and quickly tick off the times from each high and iow in sequence and_ note the clustering. Additionally this method affords us the opportunity torun the tape BACKWARDS _ with the zero time at the present hour and the Fibonacci hours going back into the past in an effort” to observe whether past highs and lows line up on the tape. If that happens and we have several” “hits” we know the current hour is important. Usually this method will pinpoint a time soon to be reached in the future where numerous hits will coincide and we can be ready for it, As market _ movements expand along the Fibonacci number sequence, we will also observe contraction along thisratio also. Using the tape measure approach backwards warms us of these contracting phases. Note also another’ technique that arises from this. number added to its neighbor eventually yields the golden ratio of 1.618, you should be aware that ALL additive series eventually end in the Fibonacci series or golden ratio. Evena series like 11 plus 50 equals 66 plus 50 equals 116.... will eventually yield a ratio of 1.618 of each number toits ~ adjacent number, Knowing this we can project future tums by multiplying 1.618 times the time _ interval between two adjacent highs or lows, or even ahigh and low, and the subsequent time period indicated will be in Fibonacci ratio to the two and give us atum. Likewise we can ADD the two time intervals between three points to get the forth point in time! easy technique should not be overlooked. 75FrBonacct HOURS Paabutoyosbatenad 1 ALCL LY (eet epee add AL pL ADL Led Hel gle at ae vary gear ‘The above chart is a reproduction of my Dow Jones hourly chart using six hours in aday and showing an “X" for each daily close. Note that this is not a bar chart but a line chart with a straight line connecting each “dot” that represents cach of the six hourly closing prices atexactly 11,12, 1, 2,3, and 4 PM. The grid cannot be seen on this drawing but the graph paper can be either 10 or 20 to the inch but it must be gne Dow Point to one hour, This particular illustration shows Fibonacci hourly counts from the major low and how they “cluster” at big turns. Note too, that the farther away from the origin you go, the more powerful the cycle tum is when you reacha large Fibonacci number. You will also note the easily identifiably “stair steps” from each swing low that defines the bull orbear trend and how the “crash” occurred when several small lower highs and lower lows developed, and then the last significant swing low was broken near August 16-19. Before leaving Fibonacci ratios Ishould note that the use of timing angles for square outs between highs and lows can also be accomplished by using Fibonacci angles. These angles when rundown to zero orup from_zero will always yield a Fibonacci relationship when they square outa high or low witha prior one. A timing line of 1.618 points per one unit of time will yield a Fibonacci relationship as will a simple angle of 38.2 degrees, or 61.8 degrees! The masier secret of the great pyramid at Gizeh of course is that the angle down from the top is 38.2 degrees and this relates the circle to the square to the triangle and ties in the orbit of the sun, moon, and earth! Much more could be said, but would give away the store. 16spect of hourly chart reading i to the hour. A good method ch as to whether a daily high or low was. y.and these columns are lined up, you will soon not thos urs. AS ca ay. lo three day patterns of strong oper ial low. These intra-day p reverse almost precisely at day is the low or high hour, end and wheth The common pattem is for bull mo’ 1 show strength early and late. This means a strong Opening and a strong close. The midday is the counter trend pull back. Most bull moves have an up 11 AM hour, a mid-day decline and a strongly up 3 to 4 hour. Oiva slightly larger scale, a weekiy bull trend will have a strong Monday, Tuesday, and pull back inito Wednesday, - day moming, then a strong Thursday afternoon and strong Friday. The bear trends are just the opposite. Please note that these pattems are “nested” so based on strong Monday we t a possi Wi hen for 4 poss id 3 to 4. {hese hourly turns first start of buying opening te g onthe day oper ‘ou stock that opens unchan, then goes down fifty when sellers have entered the market and will be there f for quite some time. Alsonote that on big down days, nobody, especially the Specialist wants to own stock. AS a result he will usually “be stuck” with inventory by midday and knows if he does not get out of 77ithe will end up witha lot more at the end of the day when day traders stick him with market- on-close sell orders. As a group the Specialists then usually engineer a late midday rally to attract shorts to cover thinking the market's going up, the specialists then sell out and go short themselves to get ready for the closing sell off. The end result is the normal pattern where in adowntrend that closes at the Jow of the prior day (meaning the Specialist was forced into buying on the close) the openings the next day are frequently up on light volume as the Specialists work quickly to get rid of the inventory and set up shorts for the day. Because of this you will almost never get a reversal buy signal from an up opening after a weak close. However, when you get another down opening, you can get a reversal buy signal. In these cases the Specialists come in with stock ftom the night before but do not see any sellers. They then open their stocks down to “test the waters” to see if sellers are there. If not, they hold onto their inventory and proceed to mark it up to hook shorts into covering and get the rally going. It is these natural and normal inventory adjustments by the Specialists as a group that often profoundly effect the market but whose actions clearly show up in an examination of the first and last hours. Similar to the Specialists are the large institutional stock brokers in their combined effect on the first and last hour readings. In the normal situation a large mutual fund calls a broker and giveshim 2 100,000 share order. The broker seeing a large commission is impatient to get the trade done knowing that unfinished orders are often canceled by the fund manager and the commission escapes. In these situations (almost always) as soon as the market opens the broker forces the trade to get at least 20 to 30,000 shares done. Once he reports that back to the fund manager essentially notifying him itis too late to pull the order, he only then becomes “responsible” and tries“‘to work” the order for the customer to get hima better price. If its a bullish day he will just lay back for afew hours to see if any stock comes in for sale, but by 2:30 he’s getting worried that if he does not complete by 4 he could lose the remaining shares the next day so he usually get aggressive and forces the issue from 3 to 4PM. In the “old days” when being a stock broker meant having some integrity the broker would simple lay back and bid for very small amounts of stock not forcing the issue and often the order could take a week or so to fill but the markets would be less volatile and the customer would get a better price. Of course the funds are themselves to blame for this practice by having driven the average commission down to 2 to 3 cents on size orders compared with former 10 to 18 cents. The result has been a brokerage community which no longer cares for the customer's orders since they are not profitable but who now trade for their own accounts against the customer's order. In any event intra-day patterns particularly the first and last hours need ‘careful study. BEmotional Charts Often I see a chart, frequently an intra-day hourly, or even five minute chart thatlooksextraordinarily volatile. I often remark at these times that the chart is t00 scary to go down. When you see frequent whipsaw moves in achart it reveals emotionalism where the participants, both buyers and sellers are nervous. The rule of thumbjs thatthe chart eventually i Thisemotionalism usually forces one side or the other to capitulate and reverse position during a runaway straight-line move, just after the emotional period. After shat move, the market usually reverses and the original nervous players finally are proven right. On hourly charts I find that the most powerful moves are always preceded by a period ofa few. _ days of extreme emotional up and down reversals. Inow have leamed to seek out these pattems _ knowing that their resolution means a quick and certain big move. These are the kind of moves you~ want touse leverage on such as with futures and options. Many of these are short covering squeezes where the entire futures pit isbetting in one direction but uncertain. Often one short covers, driving the market up only to have a new short put on a big position and send it right back down. Only after everyone eventually gets short is the entire pit trapped, and a stampede usually results. On individual stocks these up and down choppy periods are the tug of war between the last of the bears and the new bulls on a busted stock just before anew bull leg up. The key seems to be five alternating higher bottoms to be certain that a genuine uptrend has actually started Onan hourly chart, as soon as \s | see at least five higher bottoms after amajor break, I know the uptrend has resumed. These higher bottoms naturally require a good 12 to 18 hours of activity, since each minor fluctuation might last one to three hours before reversing and in order to get at least five consecutive higher bottoms on plunges, we alsoneed at least fourrallies_ up that fail. Five is the key number to remember. Many a market movement lasts until three bottoms have been made and then collapse, and occasionally four higher lows are seen, but when five bottoms are seen it is almost acertainty that the trend is up. This is a most important principle” of investing and will make you huge amounts of money if paida attention to, Most traders think a trend reversal can only occur aftera price level isexceeded or a downward sloping trendline from the last top is exceeded. We know from our basic trend principle, however, that the trend is a pattern of higher bottomsand higher highs for an up trend and this pattem may appear significantly 79below any resistance level froma arene Inthese areas Lofien find myself comfortably invested while most tra forced into breakout buying just v ‘when they should be selling. Option premiums at these levels are likewise very favorable. Always keep in mind that the “wiggles” on the tape are emotionalism of the crowd and if examined from the safety of an analytical vantage pointa sensible trading strategy can often be constructed with an almost certain knowledge of the trend. Most intra-day patterns have an emotional tug of war during the mid-day hours of 12:00 to 2:30 PM EST. These daily emotional patterns are caused by the pit day traders who never know if the market will reverse on them or not. In these cases it is helpful tonote where the emotional action takes place. That is whether it is a consolidation zone just above a breakout or is it a consolidation just after a breakdown. The odds usually favor a resumption of the major trend in these cases. One of the easiest trades is when emotional trend reversals take place within a powerful upward_ sloping parabolic arc formation. Thisis the last acceleration ph: the market i altaid of neigh is St just the number of consec to ae ion mark goes long. It is amazing ym_a stop loss viewpoint. These n defined and a spe Sell stop placed below that arc is. almost never hit until the fit nal high high i is in.’ Wa go! keyi in these moves is to observe abnormally small “creeps ” for many continuous bars inarow. This is almost always the sign of a very powerful moye that will not be exhausted until the “big Inthe final analysis, leam thatall of trading is an emotional experience. Good traders have disciplines that prevent them from getting caught up in the greed or fear of the trade. If you sense the market is“too dangerous” to do something, know it’s not. Itis only your greed for money that prevents you from analyzing the situation. The trend is your friend and if you trade with the trend the market isnever dangerous. What is dangerous is not to realize you are caught up in emotionalism and you are making financial decisions that will affect your life. 80p Major Downirend — i iy —" ; Very Volatile if |) S&P Futures 46.) 5 Minute Chart i 49.50 467.604 59 pare/tine The above chart while only a five minute chart is, however, typical of nervous markets where a major change in trend may be taking place. On the above chart a major downtrend has just started and undoubtedly the entire pit is aggressively short and nervous. A big rally is likely, but just as likely is a bigger break afier that rally comes and relieves the psychological pressure. Remember weneed higher bottoms to turn this trend up anda solitary big spike rally will not do that. During nervous markets like this, it pays to find the average measured movesand alsothe extremes. Quite a few trades can be made before this nervousness dissipates, or the trend definitively changes. 81Common Patterns ‘The most common problem for the traders determining if the existing trend is changing. After a long decline oradvance, one naturally gets nervous about a position reversing and what kind of trading strategy to employ. Common situations are astraight line plunge decline and trying to figure out what kind of bottoming pattern will emerge to turn the trend back up. Bottoms can be “V" bottom spikes; rounding into'a bowl; or double, triple, or multiple testing plunges to the same area before the real advance gets underway. The item to note about patterns developing is where the first “wiggle” occurs. By this I mean a visible counter trend movement that then subsequently fails and the existing main trend continues. Usually there willbe three or five such waves before a low is reached, although Ihave often seen 7,9, and even 13-15in strong trends before a big reversal is made. What is not usually known is tremely p = ic of the t urat the exact midpoint or the one third mark, but often are at Fibonacci ratios of 236, 382, — or 618 of the total distance. With our technique of “measured moves” in usually estimate early into the ne y trend exactly how far it will travel based on past meas moves that havea. similar! ed “wiggle”. Larger waves are usually proy proportionate so the same symmetry ona ‘smaller past observation can be applied to the existing larger movement deriving the appropriate ratio expansion factor from the first counter trend mark. ‘The most basic principle I wish to convey to you is that the more “wiggles” a trend has, the ists oF iggles are frequently referred toas “climbing a wail of worry.” The “worry” part is the ~ ‘numerous minor counter trend movements the shake traders out of their positions. These patterns are extremely reliable, so much so that I make a habit of searching for trends with frequent whipsaws to trade in. Once the main trend is determined, you merely buy every dip, or short every rally, and this will be successful for a great many trades ina row, Traders have a practical rule todo the same thing until it lases money and this is based on this principle of the reliability of “wiggles”. Recently the stock market broke and plunged about 100 Dow Points in two days. Many people were frightened and called me for advice. On my hourly chart I noticed a “straight line” decline that dropped almost 8 to 10 points every hour for the two days or about 50 points each day. There 82