Rudiments of Gann Theory: Narrow Markets Cotton 1946 – 1949

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Reposted from Super_romeman_Gannstudygroup

 

According to W. D. Gann, a narrow market is “always accumulation or distribution” [1]. Mr. Gann uses several terms to refer to a market under accumulation or distribution. Such a market, he says, is narrow, dull, sideway or sideways, under consolidation.

“The market will often narrow down and hold in a narrow range for several weeks or months. This is when accumulation or distribution is taking place. Time is required to complete accumulation or distribution and for prices to square out in time from previous tops or bottoms. When the market becomes slow and dull, wait until activity starts and a definite trend is indicated; then follow it.” [2]

“A dull market, in a narrow trading range at any point, indicates that it is getting ready for some kind of a change and you should follow it which ever way it breaks out, up or down, after these narrow, dull periods.” [3]

“Stocks that hold in a narrow trading range for a long time should not be traded until they break out on the upside or break bottoms on the downside and show increased volume of sales and activity.” [4]

“When prices are in a narrow trading range, which they often are at extreme low levels, WAIT! Allow the market plenty of time to give a DEFINITE INDICATION which way it is going. You can make plenty of profits after the market has broken out of a trading range, either up or down.” [5]

“SIDEWAY MOVEMENTS You often hear traders say: A stock can only go two ways, up or down, and that it should be easy to keep right on the market. This statement is not exactly correct. If stocks always moved straight up or straight down, it would be easy to make money, but stocks often have sideways moves. While they are in a movement of this kind, they hold in a narrow trading range sometimes weeks or months, getting neither higher nor lower than a previous top or bottom. Moves of this kind fool traders many times and cause losses. A stock starts up and they think it is going higher, but stops, reacts, gets back around the old bottom, and they think it is going lower and sell it short, but it stops and goes up again. When a stock is in a position of this kind, the only thing to do is to leave it alone until it breaks out of an area one way or the other. After it gets out of the sideways movement, which is always accumulation or distribution, and breaks into new high or new low territory, then you can trade in it with some certainty of having determined the correct trend. …

“Leave stocks alone when they are in a sideways movement and always use the rule of waiting until they cross 3 points above the old top level or break 3 points under the old low level before making your commitments. Following this rule will save you many months and weeks of waiting and will prevent losses, because if you wait until the stock gets into new territory before you get in, you certainly will have a better chance to place a close stop loss order, which will protect you or get you out in case the stock is not going to move, while if you make a trade when it is in a sideways movement between two points, your chances for making profits are much smaller. These sideway moves are periods of rest and preparation for a new move one way or the other way.” [6]

All of this discussion about narrow markets, of course, relates to the discussion of Supply and Demand [7]:

“The tape is the great scale in which the weight of all buying and selling is weighed and the balance of Supply and Demand shown by the loss or gain in prices. When Supply exceeds Demand, prices decline to a level where Supply and Demand are about equal. At this stage fluctuations become narrow and it may require weeks or months to determine which way the next move will be. When Demand exceeds Supply, prices advance.” [8]

In other words, when there is an imbalance between supply and demand, prices are on the move, either up or down. When there is a balance between supply and demand, prices stay within a narrow trading range “and it may require weeks or months to determine which way the next move will be”. This narrow trading range is what Mr. Gann calls the “Normal Zone” in his first book.

“The stock market can be divided into seven Zones which determine the different stages of activity. There are three Zones above normal and three below.

“The Normal Zone represents something near actual intrinsic value, as far as human judgment can be depended upon and as far as the ticker tape can analyze it from supply and demand. The line marked ‘normal’ we consider as a place where buying and selling is about equal and fluctuations are very narrow, there being no incentive or reason apparent for any wild speculation up or down. Either accumulation or distribution may take place around the Normal Zone.” [9]

Surprisingly perhaps, not every top or bottom — even if it was a cyclical top or bottom — was of interest to W. D. Gann. 

“It is just as important to know when not to enter the market as it is to know when to enter it.” [10]

Periods of accumulation and distribution are just the right periods to avoid, he writes:

“You should keep out of slow trading markets or watch until you get a definite indication of a change in trend. There was a slow trading market from November 1946 to November 1949, that is the range in most stock was narrow because the market was going through a period of consolidation or accumulation and getting ready for the big bull market which followed later.” [11]

Also, he says, narrow markets in low-priced stocks can be particularly frustrating:

“A study of past history proves that buying low price stocks often ties up capital for a long period of time. You wait, and if you do not lose money you lose your patience and when your patience is exhausted in advance of the start you get out. Many low price stocks have held in narrow trading for 5, 10 years or more before they started to advance or to decline and some, after remaining in a narrow trading range for a long period of time, declined to new low levels. The best way to make money is to take higher price stocks and buy them after they have broken into new high ground and show activity as outlined under the rules below.” [12]

As you can imagine, Mr. Gann found charts essential for the study of narrow markets.

“… remember, prices can move in a narrow trading range for weeks or months or even years and not make a new high or a new low. But after a long period of time when the stocks break into new lows they indicate lower prices and after a long period of time when they advance above old highs or old tops they are in a stronger position and indicate higher prices. This is the reason why you must have a chart a long way back in order to see just what position the stock is in and at what stage it is between extreme high and extreme low.” [13]

And during the actual period of accumulation and distribution, keeping multiple time frame charts can be especially important, he believed.

“A change in trend on the semi-weekly chart is of greater importance than a change in trend on the daily chart. It is much better to rely upon this chart than on the daily chart when markets are in a narrow trading range.” [14]

Furthermore, the comparison of the performance of different stocks he also considered advantageous:

“Stocks which decline and make bottom and show accumulation before other stocks reach bottom indicate that they will be early leaders in a bull market.” [15]


romeman
Sept. 15, 2017

Reposted from Super_romeman_Gannstudygroup


[1] W. D. Gann, Wall Street Stock Selector, p. 85; How to Make Profits in Commodities, p. 52.
[2] W. D. Gann, “The Basis of My Forecasting Method for Cotton,” p. 35.
[3] W. D. Gann, How to Make Profits Trading in Commodities, p. 59; see also “Form Reading and Rules for Determining Trend of Stocks,” p. 13.
[4] W. D. Gann, New Stock Trend Detector, p. 34.
[5] W. D. Gann, “Rules for Trading in Soy Beans, Corn, Wheat, Oats and Rye,” October 1950, p. 16.
[6] W. D. Gann, Wall Street Stock Selector, pp. 85,87; see also How to Make Profits in Commodities, p. 52.
[7] https://groups.yahoo.com/neo/groups/gannstudygroup/conversations/messages/257 .
[8] W. D. Gann, Truth of the Stock Tape, p. 7.
[9] Ibid., p. 55
[10] W. D. Gann, “Forecasting,” p. F-18.
[11] W. D. Gann, “Speculation A Profitable Profession,” p. 1.
[12] Ibid., p. 2.
[13] Ibid., p. 3.
[14] W. D. Gann, “The Basis of My Forecasting Method,” p. GA-24.
[15] W. D. Gann, New Stock Trend Detector, p. 46.

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