Analyzing The S&P 500 Index Using Gann

09/22/05 12:13:29 PM

by Koos van der Merwe

Hurricanes, hurricanes, hurricanes. As if the US economy doesn't have enough problems.

Security: SPX
Position: Sell

The hurricanes hitting the US Gulf Coast appear to be getting larger and more violent, as well as more frequent. Hurricane Katrina caused a disaster in New Orleans, and hurricane Rita, which will hit near the same area over the coming weekend, appears to be even more powerful. All this destruction and chaos is hurting the US economy. We all know that oil prices are high and rising; that insurance companies are being stretched to the extent where they are claiming that insurers are covered against a hurricane, but not a flood; that population displacement is reaching unheard-of proportions. The question on everyone's lips is, Is this the trigger that will start the widely forecast recession? The chart of the Standard & Poor's 500 in Figure 1 can give us some answers.

FIGURE 1: SPX. Here's a monthly chart of the S&P 500, with a Gann fan superimposed.

Graphic provided by: AdvancedGET.

Figure 1 is a monthly chart of the S&P 500, with a Gann fan superimposed. The fan was started on October 31, 1974, with a scale of 5. You can see that it did not hit the top on August 31, 2000, and we could argue that you could have used a scale of 4.6 and the 1x1 angle would intersect the top exactly, but as a Gann purist since the 1970s, I stick to the numbers he used, namely 1, 2, and 5, and multiples or divisions of these numbers by 10.

I have drawn a Gann fan with a scale of 5 down from August 31, 2000. Of course, had I used a scale of 7, the fan would have one of its angles highlighting the low of 813 on October 2002. From this low, I have drawn another fan upward with a scale of 5. I have also drawn horizontal lines from the major lows and highs.

I have shown my preferred Elliott wave count, which is suggesting that a B-wave top could be forming. This will be followed by a 5 impulse C-wave down.

I have drawn Fibonacci retracement levels calculated from the low of October 3, 1974, to the high of August 31, 2000. This is suggesting a target of 628.75 should the index collapse to the 61.8% level (0.618).

Finally, my indicator of choice for this monthly chart is the moving average convergence/divergence (MACD) indicator.

So what is the chart telling us?

a. The 1 x 4 angle upward is hitting the horizontal line drawn from the high of August 31, 2000, on September 30, 2005. This is suggesting that should a downturn start, it could occur on that date, or close to it.
b. On July 29, 2005, the index found resistance on the 1 x 1 angle moving down from August 31, 2000. This is suggesting that the index may have already turned, and will gather momentum on September 30.
c. The 1 x 4 angle moving down from the high of August 31, 2000, is hitting the horizontal line drawn from October 31, 1974, to September 1, 2006. This is suggesting that should the index move down as suggested, it could find support at that date, and start moving up.
d. The 1 x 1 up drawn from October 31, 1974, and the 1 x 1 down drawn from August 31, 2000, intersect on May 25, 2007. This suggests that the move up suggested in c will find resistance once again on the 1 x 1 line on May 25, 2007, and start collapsing in the final wave into July 4, 2008 or later... not shown on the chart.
e. Finally, note the MACD oscillator, which is close to giving a sell signal. A major down move, triggered by the extent of the hurricane devastation, will give a definite sell signal.

Is hurricane Rita the last hurricane to hit the US mainland this year? At the moment, no one knows. Will the damage caused by the hurricanes seriously undermine the US economy? Airlines are already feeling the pinch of higher oil prices, and one airline, Delta, has moved into bankruptcy protection. Toyota has already announced that they will manufacture more hybrid cars than in the past, and GM has followed suit, stating that even though costs may be higher, within five years, trade-in values of hybrids will be greater than gas guzzlers.

The US economy is already being affected. What is the trigger that will cause the inevitable major collapse that Gann and Elliott is suggesting? Another hurricane, or...?

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.