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Call The S&P 500 With Gann And Elliott

10/10/03 10:20:08 AM
by Koos van der Merwe

When W.D. Gann passed away, he left a study full of papers containing reams of research. He earnestly believed that man's emotions were ruled by planetary and mathematical influences; the planetary research is pooh-poohed by many today as crazy, but so was the work of Copernicus in his day. I have spent years researching his work, and his forecasts using his Gann angles based on the 360 degree circle still continue to amaze me. Here is an example.

Security:   SPX
Position:   Accumulate

I have started his Gann angle from the low of 60.96 made on October 31, 1974. I remember the period well because in 1967 I prepared my first point and figure chart, having just discovered technical analysis. Two years later, I experienced my first bear market and never called the 1974 low simply because computers were not around then.

It is still surprising that a 1x1 Gann angle acted as a resistance level for the S&P 500 index on March 30, 2000. Incidentally, I have stuck to Gann traditions, using a round 5 and not a fraction to determine the angle as suggested by most computer programs of today.

Gann also believed that the retracement levels between a high and a low would be in eight levels, rather than the Fibonocci retracement levels suggested by Ralph Elliott. This was because the market traded in eighths. Today the market trades in decimals, so this may no longer apply. Retracement levels could probably be in tenths today, but as a tradionalist I have included retracement levels based on eighths on the chart.

I have also included my current Elliott Wave count of the rise. But as Ellioticians are aware, I have an alternate count always ready in my back pocket to be pulled out if necessary. Finally, I have included a 13-26 MACD indicator with a 9-period moving average trigger.

A monthly chart of the S&P500 index with Gann fans and Wave count.
Graphic provided by: AdvancedGET.
Looking at the monthly chart, if you were drawing a Gann fan, you would have started with the 1x1 line on October 31, 1974, probably using 1 as the scale, then changing to 2 as the tops were taken out. You would have ended with 5, which, as the chart shows, held and called the true top as a resistance (almost) level.

For myself, from the low of 1974, to the high of 2000, I drew the eight levels as suggested by Gann. These could act as support levels for the index and the index truly found 0.5 as a support level.

From this high, I then drew a Gann fan using the same scale as the rising fan. Hopefully, this fan will call the market bottom, but here I look not so much at the 1x1 line calling the bottom, but a 2x1 line, because bear markets fall faster than bull markets rise. The 2x1 called the bottom on March 31, 2003, but not at the low, which was earlier on October 31, 2002. Interestingly, on March 31st the MACD indicator broke above its trigger, confirming a buy signal. Looking back I can see the MACD started flattening out on November 1st, suggesting a possible change in market direction.

What about the future? The chart shows that the index broke above the 994.26 "eighths" resistance level, and could test the 1183.32 level. The 2x1 downtrending Gann line could act as a resistance level, but I doubt it will. It would more likely be a trendline that the index will follow moving down.

A turning point date for a top suggested by the uptrending and downtrending 2x1 angles crossing is January 21, 2005. A second date where the downtrending 2x1 crosses the horizontal line drawn from the low of 1974 is April 14, 2006.

Finally, my Elliott count suggests that March 31 was the top of Wave V, and that the down move is a Wave A. This is based quite simply on the length of time of the down move to Wave A, from March 2000 to March 2003, a period of three years, whereas the rise from 1974 to 2000 is 26 years. If my count is correct, this means the move up is the volatile, unpredictable Wave B, with Wave C still to follow, probably from January 2005 or April 2006. A flattening of the MACD line will give us fair warning of a change in direction.

It is difficult to call a Wave B top, and in a further attempt to do this, I would have drawn a Gann fan upwards from the bottom of Wave A, but that would have made the chart too busy. So, for those who attempt to draw the fan, there is a crossing of 1x1 lines on September 2007, which could be another date suggesting the top of Wave B, or the bottom of Wave C. Only time will tell.

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.

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